Haste makes waste

26 January 2009

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The current market conditons mean a lot of companies will fold. Many are unsurprising - when was the last time you shopped in Woolworths (excluding Pick-n-Mix)? In fact, Standard & Poor's estimates that up to 75 European businesses from its speculative grade category could default this year for around EUR20bn. Though high, the wave of bankruptcies in the UK may exaggerate the true level of "failure", as some banks overzealously close the curtain on a number of businesses they lend to. Work-out restructurings seem a thing of the past

The recent Land of Leather administration highlights this. The debt-free company asked for a £10m loan to bridge a cashflow problem, against revenues of £232m in the year to August 2008, just 3% down on the previous year's figures. Perhaps Barclays' took the company's dramatic profits plunge (88% to just £2.3m over the same period) as a sign the company did not have a future. Or maybe the bank, like many others, prefers to be rid of as many problem children as possible, even if they could be turned round with the right mentoring.

This last consideration is worrying in that lately, many fear the banks are too quick to call time on businesses. The fancy word is de-leveraging, and certain banks are more eager than others, rightly or wrongly (a situation not helped by the Government's mixed messages to banks of "reduce your balance sheets" as well as "lend more"). The latest banking rescue package, including the BOE's new capacity to lend directly to businesses, highlights the Government's concern that haste makes waste. The BVCA is also concerned (page 5).

One private equity lawyer recently told me that he was advising on a business which was ticking along nicely (double-digit profits annually), and was servicing its debt, with no risk of it missing a payment. Despite this, the incumbent bank called the company out on technical covenant breach. For this, the bank imposed a six-figure waiver fee, as well as a £25,000 per month "monitoring" fee until the covenants were met again.

While this may be legal, it is not nice, and it is probably not necessary for solvent companies. In a market where banks are increasingly talking about relationships and how important they are to fostering successful deal doing, it might be worth taking a dose of their own medicine.

Yours sincerely,

Kimberly Romaine

Editor-in-chief, unquote"

Tel: +44 20 7004 7526

kimberly.romaine@incisivemedia.com.