| UK construction continues to be a difficult sector in which to operate. While construction output rose 0.5% on the previous quarter in Q2 of 2011, it fell 1.6% year-on-year. Orders in particular shows a worrying trend: according to ONS, new orders in the construction industry decreased by 16.3% on the previous quarter in Q2 and by as much as 23.2% year-on-year, meaning that the total volume of all new orders is now at its lowest level since 1980. This significant decline is due mainly to government cuts, as public sector housing and non-housing orders decreased 30% and infrastructure spending dropped 25% from the previous quarter. The impact of the austerity measures has been noticeable since the second half of 2010, as these led to a fall in expected projects and income for contractors who had previously focused their business on the more resilient public sector. The construction sector remains extremely competitive, but public sector spending cuts, deferred private sector capital expenditure and a lack of bank financing have all hampered projects from even getting off the ground. The result has been falling orders and low tenders: often priced no higher than break-even. Margins have been squeezed by powerful lead contractors demanding across-the-board discounts and extended payment terms from their supply chains, and by the cancellation of high profile framework agreements, to be replaced by competitive tendering. The situation is exacerbated by the risk of upstream insolvencies, difficulty in collecting retentions and reduced access to working capital. With these unstable market conditions, the effect on construction projects of the price of commodities like steel is of particular concern. Crédito y Caución sees a deterioration of payment patterns throughout the sector in 2010 and early 2011. Moreover, insolvencies in the construction sector are above the industrial average: according to the Insolvency Service, the number of construction and property companies in administration accounted for 21% of all UK administrations in 2010. With more impending government spending cuts and overall economic woes, we expect the number of insolvencies to remain high. Our underwriting approach remains cautious across all construction subsectors. As with other industries, Crédito y Caución seeks the very latest financial information to ensure that we can accurately assess each buyers viability. That entails regular meetings with buyers and a close scrutiny of both forward order books and exposure to sectors that are known or forecast to have declining workloads, to ensure that we can continue to offer cover on viable business. Consumer durables retail feels the pinch of adverse consumer sentiment In view of adverse consumer sentiment and rising consumer prices, the already difficult trading conditions for the consumer durables retail sector are about to deteriorate even further. There were a number of high profile retail insolvencies during the recession and, while default rates declined noticeably in 2010, Crédito y Caución expects an increase in 2011. There have been close to twenty significant consumer durables failures already this year, suggesting that 2011s total will exceed that of 2010. The challenge for retailers is to ensure that whatever money is currently spent within their sector is spent in their own stores. This however will lead to unprecedented levels of competition. With input cost inflation continuing to be an issue, competing on price is tough and therefore a retailers ability to differentiate its offering in some other way is vital to maintaining market share. Those that can are likely to flourish, while those that cant are in danger of failing. On a positive note, many businesses in the sector are now placing greater emphasis on their working capital management and in particular keeping a tighter rein on stocks. This has reduced companies exposure to short-term cash crunches which can often be fatal. On average, payments in the consumer durables retail industry take around 60 days. Crédito y Caución has received an increased number of notifications of non-payment from this sector since Q4 of 2010 - clear evidence that trading is currently difficult - with the largest rise in payment delays seen in the furniture retail subsector, and indeed the subsectors of particular concern at present are those offering big-ticket purchases such as furniture and domestic appliances. With continuing fragility in the job market and restricted lending availability, both the willingness and wherewithal to go out and buy a £1,000 sofa or television have receded. Businesses in the furniture and domestic appliance/consumer electrics subsectors have a relatively high fixed cost base and therefore lower revenues can very quickly cause difficulties. The increase in the number of insolvencies in these subsectors is therefore not surprising. The consumer durables underwriting team in the UK foresaw that 2011 would be a very difficult trading period for the sector. As with all sectors, cash flow is our key area of analysis but, within that, Crédito y Caución focus particularly on the businesss stock management and the financial structure of buyers. The consumer durables retail sector is one where private equity has a higher than average presence, and so understanding how the retailer services its financing obligations is essential to accurately analysing the risk. High commodity prices put clothing retailers under pressure Crédito y caución always monitor the retail sector closely, for trends in consumer behaviour etc, and particularly the clothing retail subsector, as it accounts for 12% of all retailing. Added to the generally subdued retail climate, with consumer spending falling victim to the austere economic environment, clothing retail is under pressure from the higher commodity costs that are eating into its already strained margins. | 
