We all know the business world is going through one of its toughest transitions at the moment, but what about the future? Insider’s panel takes stock of the business climate.
IN ATTENDANCE
John Gregory chief executive, Gregory Distribution
Clive Hetherington
director and head of large corporate – South West, Lloyds TSB Corporate
Markets
Brett Raynes managing director, Backup Direct
Lee Killington
financial markets director, Lloyds TSB
Roger Hawes partner, Burges
Salmon
Martyn Gregory corporate finance partner, Deloitte
Edward Webb
managing director, Playforce
Paul Barber regional director – South
West, Rydon Construction
Martyn Jones partner, Alder King
Christian
Annesley editor, Insider
Are banks starting to lend again?
Clive Hetherington It’s been a rollercoaster 12 months, but at Lloyds we are cautiously optimistic. On the corporate side, funding larger businesses, our ability to fund is undiminished. Capital and availability of funds is not an issue. But finding suitable businesses with demand for funding isn’t easy. While not all the banks are in the same position as us, most are looking for opportunities. Costs for banks have risen but with the base rate so low, funding is not that expensive. The government wants us to lend – it’s up to us to lend to the right business.
Roger Hawes Is this genuinely new money you have to lend? Hetherington Some is new money from the government. But the real issue is demand rather than supply.
What are economic conditions like for businesses at the moment?
Hawes I think there are reasons for optimism. Any day without awful news is a reason to be positive.
John Gregory We have all suffered over the past six months. The reality is that the public debt will have to be paid for in the years ahead through higher taxes. UK businesses will be paying the price for a long time.
Brett Raynes Every sector faces different pressures. Construction is feeling the pressure in a different way to Backup Direct and its software-as-a-service business. Our sector is still growing so we aren’t feeling the pressure as much.
Paul Barber Yes, the bottom of the market occurs at different times for different sectors. In construction, any upturn will take some time to filter through in the form of building projects. So we have to hunker down for the time being and get through to that new pipeline of work. We are optimistic, but have to be sensible about our forecasting.
Raynes The risk of inflation rising is also on the horizon.
Martyn Gregory The most notable change for me is that people have stopped fearing the future and are now getting on with business.
Lee Killington Interest rates are extremely low and that is filtering through to the economy. Once uncertainty about job prospects eases, people should start to spend again but that will be inflationary. Going into 2010 and 2011 there is a real risk of higher interest rates.
John Gregory One strong sector is groceries. The drinks sector is another – I know one company that is significantly ahead year-on-year. But on the non-food side it’s true that in September and October 2008 business really slumped. We saw more bad debts in those months than we had in the previous 90 years of trading. These are companies that ran into problems because the banks pulled the plug on them.
Edward Webb I think we are all still adjusting to the new reality. The advisers in my private equity-backed business were telling me even in the first half of last year to invest for growth, and took a little while to get spooked, but now argue that I should be keeping a lid on costs.
So what are the prospects for the economy in the years ahead?
John Gregory There is a lot of public sector debt weighing on the economy. Higher taxes will have to pay for it, and public sector investment will reduce.
Webb For my business, which supplies to schools, there has been investment in schools to sustain the company but at some point the tap may get turned off. The recession for us could arrive in two years.
How can companies mitigate the risks?
Hawes You have to fix your cost base to a realistic level.
Killington In the interest rate markets there is a window of opportunity for businesses to hedge against the interest rate on their debt. For some businesses that could be worth doing. Also some companies may want to hedge against the foreign exchange market.
Raynes Is this a time to invest in sales and marketing for businesses?
Barber For Rydon the competition is hotting up. You have to differentiate while keeping costs down.
Hetherington With the market so volatile, commodity hedging is also more popular: businesses hedging against rises in the cost of commodities whose price impacts on their business. Companies can hedge against these costs over long periods, up to ten years sometimes.
What opportunities are there for businesses just now?
Martyn Jones There is a great opportunity to find high-quality staff. In any professional area that is true. For investors in the commercial property market there are opportunities to pick up property that can offer a good return.
Martyn Gregory There are weak companies, which could present opportunities for stronger ones.
Webb For a relatively small company like Playforce, the downturn means manufacturers are more willing to work with the company because their pipeline of orders elsewhere is flowing less strongly.
Hawes We have just completed work on a corporate deal that illustrates how there are opportunities out there and deals can still be done. What kinds of deals? Hetherington We aren’t seeing much traditional activity, but there are opportunities to pick up assets and take advantage of market conditions.
John Gregory Some smaller companies that have been through a stressful time may also be looking to get out just to cut their losses.
What about getting paid? Is that a real concern in this climate?
John Gregory We had a FTSE customer tell us last year that it was extending our terms by 30 days. That was a huge issue for us. If the government could legislate on that it would be huge.
Hetherington Undoubtedly, and it makes building relationships with suppliers more important.
Are different skills required to succeed in the years ahead?
Barber The business has to be managed better. In construction only the best will thrive now. It’s about retaining the best people.
Martyn Gregory In the bull market of the past decade everything became commoditised. Relationships became less important. One of the benefits of this downward cycle is that all markets contract and the importance of relationships returns.
And where will growth come from?
John Gregory There could be an opportunity in overseas markets, but the global downturn has counted against that to a large extent. The demand isn’t there yet.
Hawes The environmental sector is one possible avenue.
John Gregory But the government’s first priority must be to get control of public sector spending and cut the public debt.
Also in: May 2009
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