The world has changed beyond recognition. Government controls the financial system and the amount of companies in hock to the banks make for a year of twists and turns. Michael Taylor reports.
Follow the logic. A couple of banks have been effectively nationalised.
Of those that have taken the government injection of capital and become state owned, their market share in the North West amounts to 60 per cent as you can. This could well lead to the biggest social change in generations.
There will be a number of businesses in the Top 500 tables this year with high gearing. It used to be the case that businesses were criticised for not having enough and was a sign of weakness. We’ve included a table in this year’s Top 500, examining the gearing levels. It also used to be the case that debt levels of three times profits was considered risky. Now it’s down to two times EBITDA.
Every where we go we hear the same story – hefty fees imposed on businesses for breaching banking covenants, renegotiations over overdrafts and the pricing of debt go one way – up. Anything new involving a bank is going to cost you.
Those in the banking world speak of a swinging pendulum between the sales and marketing guys and the cold hearts of the credit committees. But the prospect of a swing back towards the sales guys is remote. Even their attitude to pricing suggests they’ve bought the argument that the rebuilding of a bank balance sheet requires punishing pricing to meet the terms the UK government’s lending to the banks, or the new sources of capital from a Middle Eastern government, in the case of Barclays.
What we don’t include, and what company accounts don’t tell you, are the banking covenants a limited company has. They are the hidden liabilities at the core of anyone’s understanding of what is important in business. Most balance sheet valuations are shot to pieces, especially if they include a property asset.
One piece of wishful thinking dressed up as optimistic wisdom is the theory that recessions are opportunities for the strong to mop up the weak. True, there are good businesses with cash reserves that can act swiftly. Those that have to use credit may find it prohibitive. We have seen some banks open for corporate transactions, but at twice operating profits, or they want interest charged as much as 4 per cent over the Libor rate. That’s before fees and any amortisation period.
The first lesson is don’t breach covenants. Talk to your banking lawyers and get a handle on what the bank is looking for. The second: cash is everything – use it wisely.
If corporates can’t buy, and banks won’t lend, something still has to give. There could be a return to solid principles of lending. The other option is elaborate mezzanine funding structures, or for banks to swap distressed positions for equity stakes – like what the banks have done with government.
This throws up the most striking feature of all. Who controls North West plc? Who will sit on the board of a company in which the banks have a large equity position? And with the car industry the most recent sector to require state aid or underwriting of loans, as the CBI and the Conservative Party are suggesting, when does that equity control of a business become a tool of government policy?
Also in: January 2009
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A glass act
Since Pilkington Glass turned Japanese in Nippon Sheet Glass’s takeover, Stuart Chambers’ world has grown. But he’s still a North West man at heart, as Michael Taylor discovers.
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Go west
She’s won admiration in her steady opposition to Greater Manchester’s Transport Innovation Fund bid and will contest Bolton West for the Tories in the next General Election. Neil Tague speaks to Trafford council leader Susan Williams.