Amazon Putting Full-Court Press on Wary Credit Insurers

Underwriters of trade credit are becoming increasingly wary of insuring Internet retailer Amazon.com's (AMZN) purchase accounts, insurance executives and credit managers indicate.

An executive at Amazon recently took the unusual step of meeting personally with executives of a large insurer to defend Amazon's balance sheet and to encourage the insurer to back the company's trade credit, according to a person who spoke on condition of anonymity.

Meanwhile, another big insurer, AIG(AIG), added Amazon to a list of companies whose credit it won't insure, according to two other people knowledgeable about the bookseller. AIG spokesman Joe Norton declined to comment, saying such information is proprietary.

With the company burning cash quickly and the financial markets essentially shuttered to unprofitable Internet outfits, trade credit is Amazon's bedrock. While the company continues to insist that it is healthy and analysts say they've seen no indication credit is being withdrawn, the developments highlight the fragility of Amazon's financial health. Amazon closed at $10 even in New York yesterday, down 80 cents, or 7.4%, compared with a 52-week high of $75.13.

Infrequent Flier?

According to a person familiar with the matter, Amazon Chief Financial Officer Warren Jenson recently flew to Paris to meet with officials of Euler, whose U.S. unit, Euler ACI, is the largest insurer of trade credit in North America. Euler has received numerous requests from Amazon vendors for insurance in recent months, says this person, who doesn't know whether Euler has agreed to insure Amazon accounts. Amazon denies the meeting took place; Euler, saying internal information is proprietary, also declined to comment.

Meanwhile, another company, Kemper Insurance, won't insure Amazon accounts alone, though it would do so if it is packaged with the accounts of other, more stable companies, says an official at the company's London office.

Trade credit insurance is sometimes used by credit managers at companies -- in Amazon's case, the book publishers and electronics distributors and others that supply goods to the retailer -- to protect themselves should a client fail to pay its bills. A highly publicized debate has broken out on Wall Street over whether Amazon will be able to do just that in coming quarters; the company's ability to reach its goal of turning an operating profit by year-end now depends on maintaining favorable credit terms with suppliers, analysts say.

Dot-Com Meltdown

Other insurers have raised deductibles not just on Amazon but on all dot-com accounts to levels that make obtaining such insurance, which has become increasingly popular among credit managers in recent years, infeasible.

"If any sector is doing poorly, we will be more cautious," says Eva Taylor, marketing coordinator at insurance company NCM Americas. She declined to talk about company decisions regarding Amazon, but did say, "I know that they are having trouble."

Some credit managers at Amazon's suppliers cautioned that the lack of credit insurance doesn't necessarily mean suppliers will tighten credit screws on the company. Still, one says, "Trade credit insurance is important, and we'd all like the insurance for a major catastrophe." (In an earlier story, TheStreet.com reported that a major publishing company has declined to extend Amazon's credit terms.)

Val Venable, the chairwoman-elect of the National Credit Managers Association and a credit executive at GE Polymerland, says that such decisions by insurance companies are used as litmus tests of the health of a company's balance sheet. However, she says, "I don't let it sway my decision one way or another."

Still, when an insurer refuses to cover a retailer's accounts, it is essentially because the company's risk of insolvency is too high. At the very least, suppliers are unlikely to extend credit terms as a result of a lack of credit insurance, say most credit officials who have followed the Amazon situation.

Polarity

Bill Curry, an Amazon spokesman, says decisions by insurance companies haven't affected supplier relationships. "Not at all," he says. "I'm surprised you would ask the question, given our strong financial position.

"We are very open with our vendors," he continued. "At any given time this year -- and I say this year because that is what we have given guidance for -- we will have enough cash to pay our vendors."

The debate over the health of Amazon's balance sheet has polarized Wall Street in recent months. On one side, former Lehman Brothers debt analyst Ravi Suria, who recently moved to a hedge fund, contends the company faces serious liquidity issues in the coming quarters. Others, such as Merrill Lynch's Henry Blodget, say they are closely watching Amazon's cash position but believe the company can meet its own target of profitability on a limited basis by the fourth quarter of 2001.

Meanwhile, the company has long been under fire for what some say are obfuscating financial reports. The New York Society of Security Analysts has held a series of forums on the company's finances. The group has recently sent letters to CEO Jeff Bezos and to Amazon's directors, asking a series of questions about the company's accounting practices and financial guidance.

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