Categories
Banks, Lenders & Investors General Rescue, Restructuring & Recovery Turnaround

The Deadline for Repaying Bank Bail-out Money Implies Continued Pressure on Business Lending

British banks have until 31 January 2012 to pay back the money made available to them by the Bank of England since April 2008 through its Special Liquidity Scheme, the support that was provided following the temporary public ownership of Northern Rock in the UK, the collapse of Lehman Brothers in the US and the onset of the global economic recession.
Where is this money is going to come from? The likely answer is from businesses and customers. While banks are likely to borrow some money via issuing corporate bonds in the marketplace it is unlikely there will be much inter-bank lending.
So it is reasonable to assume that banks will make up the difference by withdrawing money from the marketplace, that is from businesses and individuals from repayment of loans and overdrafts.  In addition to reducing existing loans, it will be difficult for banks to find new money for lending and businesses and other borrowers will find it harder to agree loans, and even if they are successful will find that repayment terms will be stricter and more costly.
The amounts involved are almost too big to imagine.  The amount due to be repaid is £185 billion which is similar to the combined value of the UK’s four leading banks (LloydsTSB, Barclays, HSBC and RBS).
At the same time the banks know they face tighter regulation on lending and capital reserves under new regulations, called Basel III, from the world’s banking regulator. Meeting these new requirements will require banks to raise substantial amounts of fresh capital placing further burden on the lending market.
At the same time the Government has now introduced a series of measures, including a rise in VAT, higher National Insurance Contributions and public sector cuts, aimed at reducing the country’s budget deficit.  The bulk of businesses on which the economy depends are small traders and entrepreneurs and if they are experiencing a combination of higher costs and tightly restricted lending they cannot plan for growth and increasing the profits they would need to be able to expand and in fact should be focusing on cash management and cash flow in order to survive.
It is difficult to see how a long gentle decline can be avoided in these circumstances, when the fact is that the banks must find the money for repayment somewhere. Double dip recession?

Categories
General HM Revenue & Customs, VAT & PAYE Insolvency Turnaround Voluntary Arrangements - CVAs

HM Revenue and Customs is Increasingly Rejecting CVA Proposals

It is not being much talked about in the marketplace but it is becoming increasingly common for HM Revenue and Customs (HMRC) to reject Company Voluntary Arrangements that would previously have been accepted.
In the past HMRC has appeared to be a great supporter of CVAs, but recently they have been rejecting a number of CVA proposals that they would have approved in the past.
While there are no published statistics on the numbers of liquidations resulting from failed CVAs, historically a large percentage have failed. Business rescue advisers and insolvency practitioners believe that the failure rate of CVAs post approval is somewhere between 60% and 70%.
HMRC website guidelines to case officers indicate that they should attempt to get arrears repaid within 12 months with longer periods being the exception. This may explain why HMRC is now rejecting more proposals.
A CVA can be used to improve cash flow quickly in order to keep trading while paying off its debts in a manageable way.  It is a legally binding agreement between an insolvent company and its creditors to repay some, or all, of its historic debts out of future profits, over a period of time.
For a business in difficulty a low level of contributions in the early period of a CVA allows it to get back on its feet in the short term while refocusing the business on survival and increasing profits, thus enabling it to pay higher contributions later in the CVA.  This increases the chances of the business being able to maintain its payments throughout the CVA period and reducing the risk of failure. High repayments required in the early stages will mean it cannot do this.
However, many CVAs are drafted by insolvency practitioners with a view to the proposal being approved, and as a result many of those being approved today are offering significant contributions to creditors, some exceeding 100p in the £.
While the greater contribution improves the chances of a CVA proposal being approved by creditors, the lack of realism about a company’s ability to achieve the commitments is the reason for such a high failure rate post approval.

Categories
Banks, Lenders & Investors General Rescue, Restructuring & Recovery Turnaround

Business Survival Depends on Stakeholder Co-operation and Collaboration

The support and co-operation of its stakeholders can be crucial to the success or failure of the efforts by a business in difficulty to restructure and survive.
Stakeholders are all those people who have an interest in the business and are likely to be affected by its activities and most crucially by its failure, and they include shareholders, investors, creditors, the bank, suppliers, landlords, employees (and their union representatives) and customers or clients.
Plainly, when a business is in difficulty and has called in a rescue adviser to review its activities, costs, business model and viability, any actions it may need to take as a result will be more likely to succeed if its stakeholders both understand the situation and support the proposed solutions.
While there is one key interest that all hold in common, which is that all have an interest in the business surviving if they want to continue to receive income from it, it is probable that the interests of some stakeholders will conflict with those of others.
Employees will be most concerned about keeping their jobs and their co-operation in any restructuring is likely to depend on whether they feel the management is considering their concerns as well as involving them in the changes that may need to be made.  If there are unions involved getting them on board can be the key to persuading employees to co-operate.
Creditors and investors, on the other hand, may just want to be paid what they are owed and whether they are prepared to forgo or renegotiate payments or finance in the short term will depend on how much confidence they have in its future. 
The bank’s primary concern is to ensure loans are secure, safe and will be paid and will want to be kept informed as well as being given evidence that the business has been properly looked at by a specialist adviser, shown to be viable and any proposals are realistic and have a good chance of achieving the desired results.
It is crucial that the rescue adviser is involved in the management of the stakeholders thus ensuring that their concerns are understood. This will go a long way to ensuring stakeholders’ co-operation.