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Banks, Lenders & Investors Finance General Rescue, Restructuring & Recovery

Toothless regulators and unrepentant 'too-big-to-fail' banks

"too-big-to-fail" banksIt has to be said that since the 2007/8 Financial Crisis from which several of the “too-big-to-fail” banks had to be rescued by the central banks, SMEs have struggled to obtain loans and funding facilities from them.
There appears also to have been little in the way of retribution for those that caused the banks to collapse, although banks have since been forced to increase their capital reserves in an attempt by the regulators to avoid having to bail them out in the future.
Take RBS (Royal Bank of Scotland), which had to be bailed out and taken into public ownership, where it still partly remains.
There has been the emerging scandal concerning its treatment of SME customers who were transferred to its restructuring arm, GRG (Global Restructuring Group), with approximately 16,000 ending up insolvent and having to close down. No bail out for them!
After intensive lobbying starting in 2013 this situation eventually became the subject of a lengthy inquiry by the FCA (Financial Conduct Authority), which earlier this year published a summary of its findings, and “recommended” that the turnaround units in all banks be reviewed, and also the relationship between banks and insolvency practitioners, who generally act as their advisers when dealing with clients in difficulties.
The FCA only published its full report in February 2018 following pressure from the Treasury Select Committee. And then in July it announced it not taking any action against RBS or its senior managers over GRG’s behaviour “because its powers were very limited” and “there were no reasonable prospects of success”.
It also announced in early September that banks will face no further action over the interest rate swap mis-selling that contributed to the collapse of many SMEs and the financial difficulties experienced by many clients who had been duped by their banks.
More recently, despite assurances to the Treasury Select Committee given by RBS CEO Ross McEwan that he was not aware of any allegations of criminal activity, in late July it was announced in the Times that a former GRG banker was being investigated by Police Scotland over allegations that RBS had demanded “tens of thousands in cash” from SME owners in exchange for forbearance on their debts.
SMEs have also been advised to get on with any claims they wish to make against GRG before a deadline of 22 October 2018. According to business news website Bdaily, so far £10 million has been paid out in compensation out of a £400 million fund and there have been 1,230 complaints from a potential 16,000 SMEs.
It is little wonder that the CMA (Competition and Markets Authority) has found in a survey of business customers that RBS was rated Britain’s worst bank overall.
Yet despite all this, ahead of a briefing to challenger banks this week on a contest for £833 million of funding, provided by RBS to boost banking competition, Ross McEwan has been quoted as saying the challengers will struggle to compete against the Big Six in the face of their recovery from the consequences of 2007/8.
But this is not all about RBS.  Yesterday’s Financial Times reported on the behaviour of Lloyds Banking Group:  “Not only did the bank seek to obstruct Thames Valley Police’s inquiries into the £1 billion HBOS reading fraud, it also prevented access to the key “whistleblower” Sally Masteron, author of the critical Project Lord Turnbull report, and then fired her because of the inconvenience of her report’s message.”
It seems clear that unless regulators like the FCA are given much more robust powers to take action against the banks, not only RBS, but all ‘too-big-to-fail’ big banks will continue to feel they can act with impunity.
How much longer before they precipitate another, albeit different, calamitous financial crisis?

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Finance HM Revenue & Customs, VAT & PAYE Insolvency Rescue, Restructuring & Recovery

Update on the business rates and appeals fiasco

is anyone listening on business rates?In August it was announced that HMRC had sent in approximately 25 staff to the Valuation Office to fix the business rates appeal portal, which had been repeatedly cited by businesses as being impossible to use.
As the only mechanism now available for appealing non-domestic rate revaluation, the portal has been cited as the chief reason for an almost 90% reduction in appeals since the 2017 revaluation and just before this blog was due to be posted an article in The Times reported that a Government survey has revealed that almost nine out of ten businesses in the first stages of making an appeal using the portal were dissatisfied or very dissatisfied with the new system.
In the meantime, the numbers of business failures, particularly in the retail sector has continued to climb; many attributing the rise in rates as a factor.
Altus Group, a ratings adviser, reported in August that bailiffs had visited 81,000 businesses because of business rates arrears – an average of 222 businesses per day over the previous 12 months.
Last week, as reported in both the Daily Mail and the Daily Mirror, ONS (Office for National Statistics) figures had revealed that more than 51,000 high street stores had closed in the past year.
Yet more pain was added after the 2.7% August inflation rise was revealed with Altus Group predicting that businesses would face an increase of £819 million to business rates if inflation remained at this level.
Is the business rates system fit for the 21st Century?
There have been many calls for a rethink on business rates, from Rohan Silva and the British Retail Consortium which said they were “no longer fit for purpose in the 21st Century”, in the Evening Standard in late August, to Wetherspoon founder Tim Martin calling for a “sensible rebalancing” to create a level playing field for High Street retailers, earlier this month.
Vince Cable, Lib Dem leader, has called repeatedly for business rates to be replaced by a land value tax payable by landowners rather than by tenants while others have called for a reform of VAT into a two-tier system for physical and online retailers.
But there has been a deafening silence from the Government, with the exception of the Chancellor, Philip Hammond, who claimed many high streets had prospered and that high street retailers needed to evolve in order to survive – no surprise given all the many worthy and pressing claims for increased spending that he will have to reconcile in his next budget.
Business rates affect not only the retail sector but all businesses, a point often forgotten in the ongoing focus on retail.
Is the Government living in an alternative universe or has it become so fixated on its own internal squabbles over the “B” word that it is ignoring all the other pressing issues facing SMEs?
Is it listening to business?
STOP PRESS: The Times has also reported that since the appointment of small business commissioner Paul Uppal last December to tackle late payment to small businesses he has helped just nine SMEs to handle complaints, a topic to which I shall return in a forthcoming blog.
Here is a copy of my free guide to getting paid on time:
https://www.onlineturnaroundguru.com/p/getting-paid-on-time

Categories
Business Development & Marketing Finance General

The fourth Industrial Revolution will need a fundamental change in business thinking

the fourth Industrial RevolutionA day after my last blog, on skills shortages and Brexit, the Migration Advisory Committee published its analysis on migrant workers and the future.
The report, commissioned by the Government ahead of Brexit, suggested there should be no special status for EU migrant workers and extending access (called Tier 2 visas) for higher-skilled workers from non-EU countries should be extended to all countries.
It also said it was “not convinced there needs to be a work route for low-skilled workers” from the EU” with the possible exception of seasonal agricultural workers.
Not surprisingly employers and businesses gave the report a mixed reception, generally negative from those who depended heavily on low-skilled migrants for production line, hospitality and farm-related work.
But given that the world is at the start of what is being called IR 4.0, or the fourth Industrial Revolution, is this an example of politicians’ and businesses’ thinking being out of date and, along with trade wars, fighting the wrong battles?
This is the thesis of Paul Donovan global chief economist at UBS Wealth Management who argues that global trade has now hit its peak and, in the future, thanks to IR 4.0 everything, from supply chains to transportation will become much shorter, with locations of production much closer to their customers.
The reason is that with the advent of robotics, AI and automation much of the production of goods could be carried out locally and affordably without the need for the constant worry about sourcing enough low-skilled workers to carry out what are essentially tasks that could easily be automated.
This would reverse the offshoring trend of the past 20 years or so that was driven by the pursuit of lower labour costs. Indeed, the onshoring of manufacturing in US has been gathering pace due to automation, exchange rates, higher transport costs and lower energy costs.
The construction industry is an interesting example, where there have been shortages of skilled tradespeople for some years and it is currently using EU workers to fill the gaps.
In the last few days research published by Altus Group with 400 UK property developers postulated that we could soon see “armies of robot bricklayers” making up for the skill shortage.  Already there are trials taking place on some building sites. Drones, meanwhile, are being used for surveying, inspections and progress monitoring.
Of course, there would be a period of disruption during the transition and the World Economic Forum (WEF) has already predicted around 75 million jobs being displaced globally by robots by 2022, and not only in the most obvious sectors.  However, WEF also predicts that a technological revolution could create around 133 million new jobs. This prediction has also been backed up by PwC.
Professor Klaus Schwab, WEF Founder and Executive Chairman, in his book The Fourth Industrial Revolution, calls this a time of great promise and potential peril.  In his book he says: “decision makers are too often caught in traditional, linear (and non-disruptive) thinking or too absorbed by immediate concerns to think strategically about the forces of disruption and innovation shaping our future.”
This suggests that business leaders will have to begin questioning everything, from their strategies and business models, to making the right investments in equipment, training and disruptive R&D.
Arguably this revolution in thinking applies equally forcefully to governments.

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Business Development & Marketing Finance General

Skills shortages and recruitment problems for SMEs amid ongoing Brexit uncertainty

skills shortages and recruitment problems not just for fruit pickersI try to avoid the dreaded “B” word in my blogs but on this occasion, I can’t avoid it as the chorus of business voices highlighting skills shortages and recruitment problems grows larger and louder.
It is no good for Government to assert that it will all be fine once negotiations on the UK’s leaving the EU are concluded when the situation is no clearer now than it was when all this started almost two years ago.
Somehow, businesses need to carry on in the interim as well as planning for the future.  Some things just cannot wait and high on the list is where and how they are going to source the people they need at all skill levels, whether or not they trade abroad.

Some facts about skills shortages and recruitment problems

Firstly, the most recent complete set of immigration figures, published by the ONS (Office for National Statistics) showed that, in 2017, more EU citizens, 139,000, left the UK than came here to work, 101,000. This was the lowest level for five years.
The independent “think tank” Global Futures calculated that the fall in immigration since the decision to leave the EU was already costing the UK public finances more than £1 billion per year and research by Scott-Moncrieff found that 51% of SMEs put Brexit at the forefront of their worries, with even those not trading abroad linking it to a decline in spending and to skills shortages.
This translates on the ground to data from the West Midlands Chambers of Commerce revealing in their quarterly report that 53% of their members were reporting recruiting difficulties and YouGov figures reporting that 23% could not retain EU nationals.
In East Anglia, the business section of one regional paper highlighted interviews with SMEs, one of them with a small local electrical contractor who had been searching fruitlessly for qualified new recruits for five months.
Equally, there are regular reports of a shortage of nurses, doctors and other health care professionals in the NHS and care homes too are finding it hard to get staff.
I have noted in past blogs the sectors where qualified people have been in short supply for many months, including in construction, the Tech sector and in engineering. The Daily Telegraph has calculated that half of all postgraduates skilled in AI had migrated overseas, 33% to leading US tech firms, 11% to North American universities and 9% to smaller US businesses – a new “brain drain” in the making?
As far back as July the Independent was reporting that six in 10 businesses have had to spend money on extra incentives, pay rises and bonuses ranging in value between £5,000 and £100,000 to persuade skilled EU workers to work for them.

What action has there been to address skills shortages and recruitment problems?

Doubtless the Government, if challenged, would say that it is listening to businesses although the message does not seem to be getting through or is being treated with some scepticism.
Given that the UK has near-full employment, even unskilled workers may be able to command a premium and there have already been warnings from farmers that recruiting enough seasonal fruit and veg pickers is a serious problem.
In late August the Home Office announced that it had developed an online “toolkit” to help UK employers to register EU citizens with a new immigration status following Brexit and to help those citizens to get their new immigration status. This has yet to be tested and given the government’s less than stellar track record on commissioning new IT solutions it remains to be seen whether it will be user friendly.
Then there is the apprenticeship levy and the Government’s target of having 3 million new apprenticeships in place by 2020. This has hardly been a resounding success with the numbers of places having slumped over the nine months of the 2017-18 academic year by 34% compared to the previous nine months. Last week the FSB (Federation of Small Businesses) revealed that there had been a further slump in new apprenticeships in the year to June, down by 28%.
Not surprisingly, the FSB, the CBI (Confederation of British Industry), the IoD (Institute of Directors) and the BCC (British Chambers of Commerce) have all called for the scheme’s urgent reform.
The question is whether the Government will do more than “listen” to business concerns and actually do something practical that works.

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Banks, Lenders & Investors Finance General

Predatory investors behaving like unscrupulous bankers

leopard with prey - a predatory investor?Ten years after the lending culture that resulted in the 2008 Great Depression it seems that the behaviour of some investors is no less predatory and unscrupulous than those of bankers 10 years ago.
Recently FanDuel, a fantasy sports site, was sold by its Private Equity investors to Paddy Power Betfair for $465 million. So far so good. However, despite the sale price the ordinary shareholders got absolutely nothing.
The background to the investment is that the business was regarded a Unicorn company (a privately-held start-up valued at more than $1 billion) with it having more than 6 million daily customers in America.
Two Private Equity investors, KKK and Shamrock Capital, provided funds, based on a valuation of at least $1 billion. However, I am sure that the actual investment was based on a mix of debt and equity with a tight agreement that included a drag-along provision that was binding on all shareholders and allowed them to force through the sale of 100% of the shares at the reduced valuation.
I speculate that despite investing in the equity at the higher valuation, the amount of equity was minimal and in any case the agreements provided for the shares having a preferential status and I am also sure provided for an uplift on the equity that ranked ahead of ordinary shareholders.
I am also sure that much of the investment was debt that will have ranked ahead of shareholders. Given the sophistication of the Private Equity investors I am sure they did well out of their pref. share uplift, fees and interest on the debt, albeit at the expense of the founders and other shareholders who will have created the $465 million value for which the company was sold.
Not surprisingly, the former owners and the ordinary shareholders are considering legal action on the grounds that the sale undervalued the business in the USA and ignored a US Supreme Court decision to relax sports gambling laws there. I don’t however believe they will be successful in pursuing a claim since I am sure that the Private Equity investors will have covered all the bases legally.
In my view this is similar to the ruthless, unethical behaviour that characterised lenders’ attitudes at the height of the lending crisis that led to the 2008 Great Recession.
The defence of such behaviour is that it is legal and one of ‘buyer beware’. Perhaps the ordinary shareholders should pursue their advisers who are culpable for leaving their clients so exposed to ruthless and unscrupulous investors.
Doubtless private equity companies, like banks, would argue that it is their job to maximise returns for themselves and their investors by whatever means, albeit within the law. However, the ethics of their behaviour and their reputation for fair dealing ought to be a concern if they are not to become regarded in the same way as bankers.
 

Categories
Banks, Lenders & Investors Cash Flow & Forecasting Finance General

The current state of the UK commercial property sector

an unusual angle on commercial propertyThe UK’s commercial property sector covers everything from retail units to warehousing, office blocks to industrial units and it is no surprise that some sectors are performing better than others.
Across the commercial property sector, UK prime commercial property rental values increased 0.7% in Q2 2018, according to CBRE’s latest Prime Rent and Yield Monitor. It found that the Industrial sector was the top performer for the 7th quarter in a row with a 2.1% increase in prime rents. CBRE is the world’s largest commercial property services and investment company.
Clearly, a major concern for the commercial sector is the dramatic decline in demand for retail space in the light of the plethora of retail failures over the past two years. This has been attributed largely to the shift by consumers to online shopping, but also to the 2017 business rate revaluation that some argued had a disproportionate impact on smaller retailers although I think it has affected all non-domestic rate payers.
The most recent quarterly survey by RICS (the Royal Institute of Chartered Surveyors) also reports: “results show the downturn across the retail sector intensifying, with stores in secondary locations displaying particularly negative rental and capital value projections.”
While the demand for renting retail shopping units may have plummeted, however, demand for warehousing has soared – attributed largely to this shift to online shopping but also to the surge in popularity of the discount supermarkets such as Aldi and Lidl.
Here, CBRE reports that there has been a “near doubling in demand for warehouse space over the past 10 years” from 130 million sq ft in the previous decade to 235 million sq ft today. This is a mixture of both leased and purchased space. This is not uniform across the UK, depending as it does on efficient road and rail infrastructure and the East Midlands counties of Northamptonshire, Leicestershire and Derbyshire have benefited the most.
The BBC reported recently that “construction is under way of 11 mammoth units at the East Midlands Gateway, which is poised to host names such as Amazon, Shop Direct and Nestlé, as well as creating 7,000 new jobs”.
When it comes to office properties, again there has been some regional variation albeit that overall office prime rents increased 0.6% in Q2, up from 0.4% in Q1 2018, again according to CBRE.
However, Central London Office prime rents decreased slightly in Q2 thanks to a fall of -0.1% in the West End. By contrast South East and Eastern rents increased 1.1% and 0.9% respectively. Suburban London Offices also reported a 1.2% increase.
One interesting development is that some specialist office commercial property companies have been capitalising on the trend for flexible offices on short-term, flexible leases, in one case earning a 48% net rent premium on its flexible leases when compared with traditional lease deals.
It is perhaps surprising in the aftermath of the Brexit vote that as mentioned earlier has been the demand for industrial premises, which RICS’ survey says “continues to attract solid demand from both occupiers and investors”.
CBRE, too, reports that Industrial property continues to outperform all other commercial sectors and, as with office space, there is a regional variation in demand with the strongest rental growth in this sector in the North West, where rental values in Q2 increased by 5.9%.
Clearly, therefore, anyone interested in investing in commercial property would be well advised to pick their sector carefully and keep an eye on the shifting trends as the UK gets closer to the date for leaving the EU in March next year.

Categories
Cash Flow & Forecasting Finance Turnaround

September Key Indicator – energy and fuel costs

energy and fuel costsWhile the biggest overheads for industrial and manufacturing businesses are generally staff, equipment and premises costs, energy and fuel costs also have a significant impact on profitability.
Indeed, for those in the transport industry, the cost of fuel can make the difference between profit and loss and is often difficult to pass on to customers.
UK businesses are particularly vulnerable to rising energy and fuel costs for several reasons.

Electricity and gas

Approximately 50% of the UK’s electricity is produced from fossil fuels, mainly natural gas and coal, most of which are imported.
21% comes from nuclear reactors however the UK’s nuclear power stations will close gradually over the next decade, with all but one expected to stop running by 2025.
24.5% of electricity currently comes from renewable sources, mainly wind farms.
As backup the UK imports electricity but it also exports some.
Gas, on the other hand is mostly imported.
Energy companies buy supplies many months ahead on the wholesale market. The UK’s six largest suppliers, nPower, British Gas, EDF Energy, Eon and Scottish Power have announced at least one price rise this year, by an average of 5.3%, and some have also announced a second rise. They are blaming these rises on higher wholesale and policy costs (such as Government requirements for the installation of smart meters).
According to most analysts the price trend is inexorably upwards and likely to remain so. It is not helped by the reduction in the value of £Sterling following the 2016 EU referendum outcome, which has made importing anything, from raw materials to goods and services considerably more expensive.

Petrol/Oil

Oil prices are vulnerable to supply and demand but here, too, there has been a steady upward trend, certainly for the last two years.
Brent Crude (from North west Europe) has risen from a per barrel price of $48.48 in July 2017 to $74.25 in July 2018. This is the source of much of the UK’s petrol and diesel. OPEC oil prices have also risen from a 2017 average $52.52 per barrel to an average of $69.02 in 2018.
Some analysts are predicting that world prices will start to reduce into 2019, but the Brexit impact on exchange rates may mean UK still having to pay more for oil. In addition, geopolitical uncertainty such as the change in the US attitude to Iran and the threat of sanctions makes a drop in prices less certain.
This is easily monitored at the petrol pump which has seen a steady rise in the prices of both petrol and diesel, currently as high as 133.1p per litre in some petrol stations.

How can SMEs reduce their energy and fuel costs?

Each company is different and much will depend on how many vehicles you need, how many and how large your buildings are and how much energy is required to run your production processes and offices.
While domestic consumers are constantly exhorted to switch energy suppliers to reduce bills, much less attention is paid to business customers doing the same. According to the website Money Saving Expert, which also provides advice for businesses, it is possible to make substantial savings through switching and negotiating with suppliers, also through collaborating with others to achieve volume discounts.
It claims: “On average small businesses spend approximately £5,100 on electricity and £4,100 on gas per year” and shopping around can save £1,000s. There are a number of buying clubs and membership organisations that are negotiating volume deals for members which again can achieve significant savings.
So, it can make sense for a business to shop around for the best deal, albeit that dual energy tariffs are not available to businesses. It is, however, possible for businesses to get one to three-year fixed rate deals.
Similarly, it makes sense to ensure vehicles and buildings are as energy efficient as possible where there are a number of grants available, although many are EU grants so don’t delay if you want to take advantage of these. Useful sources of information about grants can be found at the Energy Saving Trust and from your local authority where the development officer is normally the best person to contact.

Categories
Banks, Lenders & Investors Finance Insolvency Rescue, Restructuring & Recovery

I welcome new insolvency proposals – albeit with a few observations

new insolvency proposals shift the balance towards rescueThe Government has at last published its proposals for changes to the insolvency regime after launching a consultation in March 2016.
The new insolvency proposals have been described as akin to the USA’s Chapter 11 system and have been broadly welcomed for the extra support they should provide to help businesses in financial difficulties to restore their fortunes rather than collapsing with often-catastrophic consequences for employees, suppliers and creditors.
Not only that but they also incorporate other Government initiative, to tighten up on scrutiny of directors and on corporate governance.

The new insolvency proposals – main elements

The insolvency proposals include the introduction of a moratorium, initially 28 days from filing papers with the courts. This is intended to allow viable companies more time to restructure or seek new investment to rescue their business free from creditor action. This would be supervised, most likely by an insolvency practitioner (IP). The proposals would only apply to businesses that are not already insolvent. While it isn’t yet clear how this will be different from the existing CVA Moratorium, it is hoped that it will be used where the CVA Moratorium has rarely been used due to the onerous obligations on a supervising IP.
Continuity of supply will be protected under the proposals with the introduction of a prohibition on terminating supply contracts to allow businesses to continue trading through the rescue and recovery process. This sounds similar to the historical essential service supply provisions but in practice was difficult to apply. It ought however to be useful as a tool for challenging ransom demands, in particular for dealing with service suppliers.
Creditors must be kept fully informed of the rescue proposals, which must also be filed with the court, and they and shareholders will be able to challenge them.
Approval of proposals will be based on classes of creditors that can also be defined although any who feel they are disadvantaged can be challenged.
For a class vote in favour of the proposal, 75% of a class by value (of the overall debt), and more than 50% by number must agree to the plan for it to be approved. This sounds similar to the existing class system in a Scheme of Arrangement.
Like existing CVA and Scheme of Arrangement proposals, once approved the proposal becomes binding on any dissenting minority.
In order to provide further protection for employees and other stakeholders the insolvency proposals also seek to enhance the Insolvency Service’s powers to investigate directors and will require directors to demonstrate how the pension pot and salaries can be covered before dividends can be paid. This makes sense as there is no such provision for CVAs.

Some observations

It is a welcome sign that Government is paying attention to businesses and their difficulties rather than posturing after high profile company failures.
The new proposals differ little from those in the 1982 Cork Report that followed a major review of UK insolvency law chaired by Sir Kenneth Cork. While that report led to the Insolvency Act 1986, its rescue proposals were significantly watered down as have been those for most of the subsequent reforms of insolvency legislation. My concern is that lobbying by IPs of the latest proposals will also result in them being watered down, indeed IPs have already established themselves as the main actors.
I would suggest that the term ‘insolvency’ contributes hugely to the demise of companies in difficulties such that I believe the proposals should be used to reform the Companies Act 2006.
Insolvency procedures work well when a company ceases to trade however they do not work well as turnaround or rescue procedures.
The Scheme of Arrangement as a Companies Act restructuring procedure is what needs updating, indeed may of the new proposals are similar. I accept Schemes have not adopted for use by smaller companies but this is easy to overcome by having templates to remove the existing dependency on those few lawyers who are familar with such restructuring. I would even advocate that IPs should run Schemes or the new proposals as revised Schemes since their existing software helps reduce the cost of administering creditors.
I am however concerned that rescue procedures ‘require’ the involvement of IPs. There are other professionally qualified people who might have more experience or at least have a greater interest in the saving of businesses.
My concern is that the new proposals become like CVAs where all too often it is in the interests of an IP that a company considering a rescue fail, or for them that a CVA proposal be rejected, or a CVA fail where failure means they can be appointed as administrator or liquidator. Indeed few IPs have believed in CVAs and I suspect few really believe in rescue and almost no IPs have ever run companies in a CVA.
In view of my comments the role of IPs needs to be carefully considered if the new proposals are to work.