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Banks, Lenders & Investors General

After TSB is HSBC the next bank with an IT problem?

HSBC branch in UKA recent experience with one of my many long-standing bank accounts with HSBC leads me to question, yet again, how well banks’ automated processes are designed to serve human beings.
While I have advocated IT and its benefits through time savings and efficiencies for a business, I have also questioned whether we are being naïve about its capabilities, most recently in my blog on June 21, when TSB was one of several organisations struggling with IT issues during a system upgrade.
Four months ago, HSBC requested that I provided evidence of my identity details for one of my several company bank accounts with them. I assumed this was one of its regular Money-Laundering checks.
I supplied the usual necessary information – a copy of my passport and a recent utilities bill.
This week, I received a cheque in the post for several thousand pounds being the balance in the account, an account through which my company has traded regularly for approximately 15 years. With it was a letter informing me that HSBC was closing the account.
This account has always been in credit and I as the sole director, along with my shareholders and account administrator have not changed since opening the account and are UK domiciled and based. We are not operating from some dodgy address in Colombia.

In its wisdom it appears that the HSBC computer said “no”

Despite my having several accounts for different businesses with HSBC, some of them for many years, and none breaching any covenants, the computer has made its “judgement” on this particular company.
How many other HSBC business clients have fallen foul of this kind of automated checking process?
Is there a problem with the HSBCs IT system? Or perhaps with the parameters they set for carrying out such checks? Or for making such “judgements”.
Or is this an early symptom of impending wider problems with their IT system?
It is ridiculous that banks do not have fall-back positions, perhaps even allowing staff to intervene and override the computer’s decision since it is not acceptable to automatically close accounts with clients after a long and perfectly satisfactory history.
Whatever the explanation it is hardly helpful for SME business customers for whom such an outcome could potentially cause considerable disruption to their daily operations.
And in a highly competitive banking sector, perhaps HSBC should revisit its system to make it more user friendly, for both clients and staff.
Picture credit: Alan Longbottom

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Banks, Lenders & Investors Cash Flow & Forecasting Factoring, Invoice Discounting & Asset Finance Finance

Are SMEs really unaware of asset finance or are they simply not borrowing?

asset finance predators?
Predators hunting prey

Last year the website smallbusiness.co.uk, published research findings that seemed to indicate that many SMEs were unaware of the benefits of asset financing.
Its report, citing research by Close Brothers, said that “almost three-quarters (72 per cent) of SMEs in the survey did not know it was possible to secure finance against their turnover” (by which we assume they mean cash flow funding which in practise means book debt), rather than their credit rating.
It also reported that while 44% of SME respondents would consider using asset finance they were not acting on this.
It suggested that many SMEs were sticking with “inflexible and often unobtainable forms of credit” because they weren’t aware of the potential advantages of alternative funding options.
The inference, in other words, was that SMEs were continuing to approach the mainstream banks, despite the widespread perception that the banks were inflexible and unwilling to lend to them.
But how true is this?
Over the 18 months or so since there have been more pronouncements from asset finance providers.
In January this year CityAM quoted the MD of a business finance group, Peter Alderson, who said: “more are exploring financial options outside of traditional bank offerings that can support the level of business development needed to compete in new tech and online spaces.”
In the same month businessmoney.com reported on a survey of brokers operating in the asset finance carried out by United Trust Bank and revealing that 39% of them expected demand for asset finance would grow throughout 2018, identifying the most likely sectors for growth as Construction, Transport, Waste Management and Manufacturing.
Martin Nixon, head of asset finance at United Trust Bank, commented: “There’s no doubt that awareness of asset finance is growing amongst UK SMEs. Lenders, brokers and industry bodies, such as the FLA and the NACFB are working hard to spread the word about the versatility and flexibility of asset finance and how quickly and easily transactions can be completed.”
This may be true, but according to the British Chambers of Commerce (BCC) borrowing among SMEs appears to have stalled.
The BCC yesterday released the results of a study it carried out with the specialist finance provider Wesleyan Bank which found that 56% of British companies did not attempt to apply for finance in the past year. Almost two thirds (63%) of them were small firms.
The study found that those that did seek finance showed a clear preference for the “conventional” which it identified as overdrafts (18%), business loans (16%) and asset finance (9%) and that half of these reported that they did so because of weak cash flow.
The BCC’s head of economics, Suren Thiru suggested that the results revealed a move from the “credit crunch to credit apathy where a lack of demand, rather than supply of finance is now the overriding issue”.
He called for the Government to do more to kick start business investment and to relieve the burden of business costs.
But is it any wonder that two years of uncertainty and opacity about the Government’s proposals for Brexit has led to the perception among businesses that the Government neither understands or takes heed of their concerns and that SMEs are holding back on growth and investment plans?
I would argue that it is not ignorance of asset finance but cost and a fear of a loss of control of assets.
The recent memories of lenders and their insolvency practitioner advisers seizing assets as an early response to default is too recent for business owners to believe that behaviour has changed and that it won’t happen again.
We advise most of our clients to consider building their balance sheet based on slower growth rather than rapid growth based on asset-based finance. It takes one slip for the advisers and lenders with penal default clauses to see profit from misery.

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Banks, Lenders & Investors Cash Flow & Forecasting Finance General

Is short term investment damaging future business prosperity?

For many years, the UK economy has depended heavily on consumer spending and on property speculation.
This may have led investors, even pension funds that require steady returns over many years, to focus too heavily on short term investment and gain and, therefore, on quarterly or annual reports and results thus undermining their willingness to wait for future returns.
However, the creative infrastructure that led to such inventions as the steam engine depended not only on “lightbulb” moments but also on people who were educated, skilled and above all had the time to think slowly and in depth.
Recently the Bank of England’s Chief Economist, Andy Haldane, has been worrying that the development of the internet has also undermined the ability to think slowly and in depth and thus the patience needed for business innovation and progress.
If UK businesses, from SMEs to large corporations, are to remain at the forefront of innovation they will need continued investment in the best brains, in research and development and in a decent infrastructure and that means investors willing to be patient for the long haul.
Is it time that more emphasis was put on education, training, employee development and perhaps even public investment in longer term projects to emphasise the importance of sustained effort and patience?

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Banks, Lenders & Investors Cash Flow & Forecasting Finance General Rescue, Restructuring & Recovery Turnaround

Another bank inquiry – increased costs for SMEs?

Yet another massive fine, RBS again, this time £56 million for a computer meltdown in 2012 that left people unable to access their accounts.
In recent weeks there seems to have been a steady stream of fines for a variety of misdeeds.
Yet will it make any difference?
We, along with many others, have been saying for months if not years that SMEs and personal customers have been badly served by the “big four” (Lloyds, HSBC, RBS and Barclays) who between them have 85% of the small business banking and 77% of the personal account markets in the UK.
And now the Competition and Markets Authority (CMA) has begun an 18-month investigation into how banks treat their customers.
Who knows how many more revelations about bank misbehaviour are yet to emerge from this new investigation?
Will there be more fines?
Despite the schadenfreude, let’s be clear fines are ultimately paid by customers, not the banks.
What has emerged is that the cleanup now means that banks don’t make much out of their SME and personal accounts which has resulted in the introduction of various regular charges and closure of branches.
It is not yet clear whether the rhetoric will result in any meaningful change that improves the relationship between banks and SMEs.
It is however clear that the cost of banking services will increase for SMEs.

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

Banks, integrity and relationships

Banks can provide “negligent advice” to customers without being held liable.
The outcome of a recent court case has effectively sent a message to banks that mis-selling of products is not illegal.
Crestsign Ltd, a small, family owned business, had challenged Natwest and RBS in court over alleged mis-selling.
The company refinanced its debts in 2008 for five years with a loan that provided for variable rate after two years. At the same time the banks recommended a 10-year interest rate swap that provided for a fixed rate of 5.65% for the ten years. When seeking to refinance again in 2011, the break costs were £600,000.
The banks denied that they owed a duty of care and claimed that any advice was limited to ensuring information given was ‘not misleading’
While the judge, Tim Kerr QC had expressed considerable reservations about the banks’ “negligent” behaviour relating to giving advice and recommendations on the swap product, in fact and in law the wording in the documents supplied to the customer exempted the banks from liability.
SMEs should beware.
Firstly, before agreeing to buy any product they should take independent advice.
Secondly, they should remember that the sale of products by a bank is likely to benefit the bank.
Thirdly, the small print is normally there to avoid liability by whoever drafts it.
And finally, relationship managers are very rarely decision makers.

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

Banks, bad behaviour and relationships

How would you define a relationship?
For most of us, it would most likely include some form of personal interaction and some clear mutual benefits for those involved.
On this basis, it seems that the banks still don’t get it. While they might talk about wanting a relationship with their customers, we’re hearing that it is still a one-way deal.
At the top level, bank CEOs and senior executives appear to have accepted the need for change, but the message does not appear to have filtered down to middle management. There may be more local managers tasked with taking care of SME customers, but when each has a case load in the hundreds and in some cases thousands, how can they hope to build any meaningful understanding of their customers’ needs?
While the marketing language may have changed it seems the behaviour hasn’t. SME customers are still being treated as ‘cannon fodder’ to whom ‘products’ are sold by a computer.
It seems banks still need to embrace the need for change – or are we speaking to the wrong customers?

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Banks, Lenders & Investors Finance General Insolvency Personal Guarantees Turnaround

Director guarantees should mean cheaper borrowing

Financial institutions, especially banks dealing with small business loans, are often asked for loans by directors of companies that do not have insufficient assets. This places banks in a difficult position because they often want to help their clients but at the same time they can’t take risks with depositors’ money. The result is that banks frequently require directors to give a personal guarantee as security for money borrowed by the company.
If the business is subsequently unable to repay the guaranteed loan then the bank expects to rely on its guarantee. Accordingly guarantors are now asked to seek legal advice before signing a guarantee or at least confirm they have been advised to get advice before signing.
Directors should therefore be mindful of the obligations they may be taking on when seeking business finance and weigh up the pros and cons.
We are, however, aware of clients being told by bank managers that they would never expect to actually call upon the guarantee. This confuses the issue as it begs the question why take a guarantee. However most likely if a guarantee exists, it will normally always be called upon in the event of a default providing the director has sufficient personal assets.
While a bank relationship manager may be uncomfortable asking a client to sign a personal guarantee and often confuse their client by trying to reassure them, the bank’s in-house recovery team won’t have a problem if the a bad debt is passed to them.
Some commentators and many aggrieved directors have tried to turn this into an ethical or moral issue but it is straightforward. Banks need security and they should not be lending money at risk, at least not retail or commercial banks. In turn the reduced risk to the bank should attract a low cost of borrowing to the client.

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

What would be on your wish list for banking reform?

A full-scale investigation into whether there is sufficient competition among banks is perhaps a step closer, though not yet a certainty, following the announcement that the CMA is to study and consult further before making a decision in September.
Quite why the CMA (Competition and Marketing Authority) needs further consultation before making the decision is a mystery when its studies so far have led to a provisional conclusion that small businesses and personal account customers have not been receiving a good service from the banks.
There has been enough evidence from the FSB and regularly released figures that small businesses have been finding it increasingly hard to access lending from the banks, that they have been mis-sold products (eg Interest Rate Hedging Products) and that the days of having a relationship with a proper bank manager who knew and understood them are long gone.
So assuming that the CMA does start a full-scale investigation in September, likely to take at least 18 months to complete, as a small business what would you like on your wish list for banking reform?

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

SMEs still waiting for redress from IRHP mis-selling

Our regular followers will know that we have been keeping an eye on this issue for some time – here’s an update.
More than two years after a scheme was set up to help SMEs recover from bank mis-selling of Interest Rate Hedging Products a Bully Banks conference earlier this month has condemned the redress scheme.
Bully Banks was set up to support SMEs and to lobby for redress for their losses to restore them to the position they had been in before being sold IRHPs.
Many business owners at the conference reported that the scheme, administered by the FCA (Financial Conduct Authority) was failing to deliver. The FCA was described as “indifferent”, unaware and complicit in its handling of the banks under the scheme.
Bully Banks reported that “only 400 SME customers have had consequential loss agreed and those for a derisory £1,800 per customer”. They also reported that more than 35% of those seeking redress had been excluded on the grounds that “they should have been knowledgeable enough to see through the bank’s deceit” and that many thousands of SMEs have become insolvent as a result of the mis-selling. Cynics might argue that some insolvency procedures were initiated by the banks to avoid paying out or being pursued for mis-selling.
Given that plenty of politicians, economists and senior figures in finance were caught out by the onset of the 2008 financial crisis, in which mis-sold complex and incomprehensible financial products played a significant part, and are still struggling to make meaningful reforms to prevent a repeat it is a bit rich that 35% of SME owners are being penalised for a failure to understand the implications of some of those same products.

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Banks, Lenders & Investors Business Development & Marketing Cash Flow & Forecasting General Rescue, Restructuring & Recovery Turnaround

An interesting idea to stimulate SME lending

According to the Business Secretary, Vince Cable, bank lending to SMEs is being “suffocated” because the Bank of England is blocking reforms to regulations on the reserves lenders are required to hold.
Under current rules, these have to be higher for business lending than they do for residential mortgages because the former are seen as higher risk than the latter. The BoE also claims that the rules cannot be changed because they are set internationally.
Meanwhile the Government’s business bank has so far lent around £780 million and is experimenting with a scheme to underwrite commercial lending to SMEs with Government funds, welcomed by the BCC (British Chambers of Commerce) who want the business bank “radically scaled up” and strengthened.
While at last there seems to be general agreement that there is a problem with bank lending to small businesses there seems to be little idea what to do about it.
Andrew Haldane, writing in the Telegraph has a suggestion, based on a commission carried out in 1931 that identified structural issues in providing SME lending, which was called the Macmillan gap after the Commission Chair, Hugh Macmillan.
It showed that while large companies tended to have a track record for profit and performance, making it easier to establish their creditworthiness, smaller ones generally do not – hence the gap. He suggests that one way of making it easier to assess SME creditworthiness is to establish a freely available credit register or database of SMEs credit history and revenues.
This would bring together data from credit reference agencies, banks, HMRC records and other government agencies to provide comprehensive information freely accessible to potential lenders such as pension funds, insurance companies and companies supplying trade credit.
Would it work and would it help?  Haldane cites “academic evidence” of considerable benefits.
This would certainly identify leads for turnaround and transformation advisers but will it stimulate lending?

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

The new parable of the talents

 

“For to everyone who has will more be given and he will have an abundance. But from the one who has not, even what he has will be taken away.”

This conclusion of the biblical Parable of the Talents (Matthew 25: 14-30) neatly summarises the results of unrestrained and unregulated neoliberal free market capitalism, as propounded by Milton Friedman (Chicago School of Economics), the model by which business and economies have  been run since the 1980s.

But even before the global financial crisis of 2008 (and more so since) economists and academics like Paul Krugman (End this Depression Now), Jo Stiglitz (The Price of Inequality) and Will Hutton (Them and Us) were questioning the model and the latest to wade in has been Thomas Piketty with his dubiously-praised book Capital in the 21st Century.

Piketty’s book claims to provide evidence over two centuries of the ebb and flow of extreme inequality of wealth, leading to his thesis that wealth grows faster than economic output. His conclusion is to heavily tax the wealth creators which proposals have been embraced by those politicians looking to justify tax increases.

Capitalism itself has come under fire since 2008 largely because it has proved such a ruthless and unforgiving system for so many people.  But, it is also argued, like democracy that it is the least worst system for providing the economic growth needed to afford acceptable living standards for the most people.

But is the problem the system itself or its unregulated consequences? And how does any of this matter to the myriad small businesses that are the backbone of the UK economy and its hope for the future?

We would argue that the essential ingredients of a healthy capitalist economy are demand, ideas, investment, resources and leadership – all essentials for running a successful business.

What is a problem, is the outcome that has so badly affected so many people and businesses. In particular the notion of ‘too big to fail’ where the capitalist model of accepting failure was undermined by the political consequences.

This was addressed at a recent conference in London called Inclusive Capitalism, where among others Mark Carney, Governor of the Bank of England, argued for a return to high ethical standards in banking and for recreating fair and effective markets.

Sir Charlie Mayfield, chairman of the John Lewis Partnership, too, defended capitalism as a force for good and for social mobility, but proposed that it required rethinking business conduct and education, encouraging wider ownership  among employees and investing in employee training and development, all of which imply a shift from short term profit-taking or rent seeking to longer term thinking and investment.

All of which, too, is something any small business owner could have told them.

As for Piketty’s claims, at least they are now being challenged by the Financial Times. Increasing taxes on the wealth creators have not increased revenue collection, nor have such policies promoted wealth creation. 

Was St Matthew the first capitalist?

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Banks, Lenders & Investors Debt Collection & Credit Management General Rescue, Restructuring & Recovery Turnaround

Strong arm tactics and fractured thinking

 

Many Buy-to-Let landlords who bought property before the Great Financial Crisis are being subjected to strong arm tactics by lenders.

UK Asset Resolution Limited (UKAR) is the holding company established in October 2010 to “facilitate the orderly management of the closed mortgage books” of Bradford & Bingley (B&B), its subsidiary Mortgage Express (MX) and Northern Rock Asset Management (NRAM). The run-off period UKAR was anticipated as taking between five and ten years.

It would seem that UKAR are becoming more assertive in their zeal to recover taxpayer money, despite the consequences.

Landlords are being sent demands, for full repayment of loans giving only a few days’ notice. If followed through this would result in personal guarantees being called and trigger the bankruptcy of many landlords.

Even when landlords are not in arrears due to low interest rates, UKAR are relying on clauses in the loan agreements such as those that relate to ratios defined as a Loan to Value covenant.

In one recent case repayment of approximately £1.4 million was demanded by NRAM giving 7 days notice even though their client wasn’t in arrears. This was following a valuation of six Buy-to-Let properties out of a portfolio of ten very different properties two years previously. Extrapolation of the part valuation was used as the pretext that the total value breached a Loan to Value covenant of 80%.

In another case, a landlord tried to sell one property in a portfolio, but discovered that the fine print meant she had to sell the whole portfolio.

It should be acknowledged that many of these mortgages are interest only which concerns UKAR about its ability to meet target dates for the run-off time frame. Furthermore most of these loans have come out of a fixed rate period and are now benefiting from low interest rates with UKAR being concerned about landlords’ ability to service interest when rates rise.

However, these concerns do not justify a 7-day notice letter.

Instead cool heads are needed to develop solutions such as those that can be developed by independent turnaround advisers.

Strong-arm tactics tend to invoke fear and a lack of trust, they are not the way to reach consensual agreement.

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Banks, Lenders & Investors Debt Collection & Credit Management Insolvency Rescue, Restructuring & Recovery Turnaround

Does the latest banking revelation have an impact on the insolvency profession?

The treatment of SMEs in the aftermath of the 2008 credit crunch by RBS, one of the UK’s two main lenders to small businesses has come under scrutiny this week.
An investigation, by businessman and government adviser Lawrence Tomlinson, has claimed that RBS may have “engineered” firms into RBS’s turnaround division Global Restructuring Group (GRG) so that RBS could generate enhanced revenue at the expense of their SME clients.
Tomlinson claims there was a “systematic abuse” of corporate clients by RBS that allowed them to charge significant fees before appointing administrators who immediately sold the clients’ business assets back to RBS’s property division West Register.
It is assumed that West Register has been required to generate its own profits for RBS by increasing the value of those assets it acquired from clients. This would suggest that the assets were bought at a very low value before they appreciated in value for the benefit of RBS.
The whole sorry saga is now being investigated by the Financial Conduct Authority and the Prudential Regulation Authority following a referral by Business Secretary Vince Cable.
While the focus has so far been on banks, the saga raises the question as to whether there has been a conflict of interests among some insolvency practitioners (IPs), who following an introduction by RBS to clients then sold the clients’ assets back to RBS under an Administration Pre-pack procedure.
While such realisations may have been legal the practice stinks and reminds me of the activities of HBOS’s Impaired Assets division in Reading which resulted in senior managers being charged with conspiracy to corrupt, fraudulent trading, money laundering and blackmail. Fortunately none of the IPs involved in that saga was charged, but it would seem that their role was not investigated.
All this suggests that the directors in these situations are not getting independent advice.
It would also seem there is a need to review the relationship between banks and their panel IPs?

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Banks, Lenders & Investors Business Development & Marketing General Rescue, Restructuring & Recovery Turnaround

Economic recovery and funding growth

A recent survey by the FSB reported that 47% of its members had been refused loans in the last three months to September and 56% felt that banks did not care about SMEs.
At the same time, the Chief Executive of the British Bankers’ Association warned that requiring banks to improve their leverage ratio (money lent out in relation to capital reserves) could “do more harm than good”. Contrast this with Sir John Vickers, who was involved in drawing up post-crisis reforms to the banking sector and his arguing that the suggested ratios are still way too low and risky.
And, banks are still facing an estimated £10 billion in potential payouts to businesses mis-sold interest rate protection and hedging products.
No wonder that banks aren’t lending to SMEs.
In the meantime large business are estimated to be sitting on £700 million of cash reserves in readiness for funding development and growth.
What are small businesses supposed to do?
Firstly, there are other sources of finance besides the banks and K2 has a free, comprehensive guide to the options. You can find it at http://www.k2finance.co.uk
Secondly, and more importantly given the prospect of over trading as the recovery gathers pace, now is the time to ensure that the business model is right to fund growth and avoid running out of cash.
Advice from restructuring professionals is not exclusive to when a company is insolvent.  Their experience and solutions can also be used to help SMEs grow.

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Banks, Lenders & Investors General Insolvency Interim Management & Executive Support Rescue, Restructuring & Recovery Turnaround

Turning around the economic juggernaut means restoring SMEs’ confidence

Business Secretary Vince Cable warned at the LibDem conference that rebuilding the economy was going to be a long process requiring investment in business, in research and in training people in the skills that will be needed in the future.
We are also told, repeatedly, that SMEs are the primary engine for the country’s growth.
The trouble is that SMEs’ confidence has been knocked for six over the last five years, not least because despite innumerable Government initiatives they have time and again been refused lending by the banks. The most recent figures on the Funding for Lending scheme published earlier this month showed that lending to businesses and consumers had fallen by £2.3 billion since June 2012.
Now the Federation of Small Businesses (FSB ) has produced research showing just how beleaguered SMEs are feeling with more than 56% of those polled believing that the banks just do not care about them and more than a third reporting sharply increased bank fees over the last year. Very few of those polled knew that it is possible to appeal against a bank’s refusal of a loan application.
Worse still only 37% of those polled were aware of alternative sources of lending, such as crowd funding. 
K2 has a comprehensive, free, downloadable guide to sources of business finance available at http://www.k2finance.co.uk . The FSB has also launched a guide, How to Get a Bank Loan, which also covers appealing against refusal, switching banks and other finance options.

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Banks, Lenders & Investors Cash Flow & Forecasting General Insolvency Rescue, Restructuring & Recovery Turnaround

It’s the political silly season again

The first shots are being fired in the annual round of party conference one-up-manship with Chancellor Osborne claiming that the economy is “turning a corner”.
Oh really?
It may look like that in London thanks to a rapidly inflating property bubble but out here in SME world even to say “turning a corner” may prove to be premature.
Monday saw publication of a survey by the FSB that had found 47% of its members had been refused loans in the last three months and 56% felt that banks did not care about SMEs, the much vaunted “engine for growth”.
On the same day, with the Banking Reform Bill due for debate this week, the Chief Executive of the British Bankers’ Association warned that requiring banks to improve their leverage ratio (money lent out in relation to capital reserves) could “do more harm than good”. Contrast this with Sir John Vickers, who was involved in drawing up post-crisis reforms to the banking sector and his arguing that the suggested ratios are still way too low and risky. Sounds like joined up banking!
In addition the banks are facing an estimated £10 billion in potential payouts to businesses mis-sold interest rate protection and hedging products. Other news such as the trade gap (between imports and exports) doubling in July and questions about where the demand will come from all challenge the notion of ‘green shoots’.
Businesses, like consumers, are under increasing pressure from rising prices, and continue to focus on cash flow.  While there may be a bit more optimism around it plainly has not yet translated into anything as definitive as turning a corner.
Lies, damn lies and statistics!

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

Are We About to See a Rise in Insolvencies?

New research by the insolvency industry’s trade body, R3, has found that the number of zombie companies has gone down by just over 50,000 since November last year.
Zombies are defined as companies that are only paying off the interest on their debt.  However, R3 also found that more SMEs are now in distress as they struggle to negotiate new payment terms with lenders or to repay loans when they fall due.
As banks have been set new targets for improving their capital reserves they are unlikely to do anything other than improve their position.
However we at K2 believe they are also unlikely to pull the plug, so the march of the zombies will continue for some time.
As a result we are unlikely to see the number of insolvencies rise until interest rates are raised. Indeed any significant rise in interest could cause the carnage that normally follows a recession where it is in fact evidence that the economy is coming out of recession.
What’s your view? Are we about to see a rise in insolvencies?

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

Investors need to rethink their requirements

Many of us believe that a change in investor culture is long overdue. We need to incentivise long-term investment in sustainable growth instead of short-term ‘quick flip’ or ‘get rich quick’ schemes that deceive everyone into thinking that making money is risk free and easy.
It is this short-term thinking that has made it more difficult for Private Equity firms to raise new funds for further investment.
Private Equity firms depend on their reputation for making profits for their investors and their problem since the Credit Crunch of 2008 has been that funds have been tied up in businesses that are effectively zombies because of the amount of debt they have, no matter whether these businesses may have good potential for growth.
Similarly both lenders and investors are very wary of taking a risk with new and small businesses, hence the Government’s failure to persuade funders to support start-up companies and SMEs, even profitable ones and those with potential for growth. The only source of funds really available for such businesses are book debt and asset based lenders but these only improve cash flow they don’t provide equity or loan capital for investment.
To address the funding culture issue we need to justify a switch from investing in property to investing in businesses. This will involve understanding a risk rated return on investment that provides for better returns to investors.
There are a number of ways of achieving this change of investor behaviour, one is to penalize investment in property by taxing them, another is to provide for matched funding from banks alongside new equity, possibly with a Government guarantee, another would be for debt forgiveness by banks to restructure their ‘zombie’ client loans alongside new equity, others could be an expansion of the Enterprise Investment Scheme and Seed Enterprise Investment Scheme, or simply a reduction in the corporation tax rate.
But all this requires a Government to confront those who view property as their source of security.

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Banks, Lenders & Investors General Insolvency

Politics and banking – an unholy alliance

Politicians remain wedded to the importance of the financial sector to the UK economy despite the ongoing aftermath of the 2008 financial crisis
So the taxpayer bailed out “too big to fail” banks and is now being treated to the misery of an austerity drive unprecedented since the last World War.
Now in the aftermath of the Co-op bank pulling out of plans to buy more than 600 Lloyds branches and the resultant downgrading the Co-op bank to so-called “junk” status ratings agency Moody, it seems there never was much likelihood of the deal being finalised.
The trusty old Co-op is, it seems, no different from other over-exposed bigger banks.  It has suffered from defaults on loans acquired by its purchase of the Britannia Building Society in 2009 leading to a loss of £674m in 2012.
All of which has led BBC Business Editor Robert Peston to ask why the now-defunct FSA did not block the Co-op’s sizeable expansion plans and why Chancellor Osborne was so supportive of the proposal. http://tinyurl.com/bm4sx7n
It would seem that the FSA set the Co-op high capital targets but, according to one of Peston’s innumerable inside sources, that it did not feel it could block a proposal that had so much parliamentary support.
Apparently MPs’ love Mutuals and the Treasury hoped that the Co-op would provide competition to the big banks.
Politicians’ relying on hope and sentiment does not bode well for any rigorous effort to regulate the banks and prevent another crisis or to the likelihood of any meaningful support for those SMEs fighting to survive in a challenging market.

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Banks, Lenders & Investors General Rescue, Restructuring & Recovery

If it doesn’t work the first time do it again only bigger

Funding for Lending has not stimulated bank lending to SMEs so what does the Bank of England do? That’s right, they’re extending the scheme, offering the banks loans at just 0.75% with no limits on how much the banks can borrow – but only if they lend more than they are receiving in repayments from customers.
And the formula applied by the Government makes it almost impossible for the banks to be able to fulfil the lending obligations. For the full details see the BBC’s blog by Robert Peston http://tinyurl.com/c38w4rp
All this has been announced at a time when the banks are also required to focus on recapitalising to even greater levels and when despite such initiatives SMEs are not borrowing, but instead are focused on controlling cash flow and paying down debt and are generally as risk averse as the banks.
So is the BoE missing the point or is the Funding for Lending scheme nothing more than excessive spin?
Which leads one to speculate whether Spinmeister Alastair Campbell is back in action behind the scenes.

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

Are we doing enough to publicise the benefits of business rescue and turnaround?

A recent discussion in the LinkedIn group, Restructuring and Turnaround Management, asked whether anyone in the turnaround industry ever received solid referrals from the banks.
Although the majority were responding from the USA, it seems there is little difference between the two sides of the “pond” when it comes to the banks.
The general consensus was that most lenders were either not interested in considering the options for rescue and turnaround for struggling clients or preferred instead to “manage” loans themselves until it is too late, when they call in the insolvency practitioners.
This comment from Al Jones in the US was typical of what he saw as the banks’ view: “we can handle this, maybe it’ll fix itself especially if we bluster and threaten the borrower, or it’s unsalvageable.”
But the question is how can a bank’s staff with no direct experience in small business or business turnarounds make such an assumption?
UK-based Andrew Strachan, pointed out that an inevitable consequence of this attitude was that while interest rates remained low the banks continued to prop up zombie businesses rather than risk losses, thus diverting resources away from healthy, growing companies with a real need for investment.
At K2 Business Rescue we too have seen very few referrals from banks in our 22 years as a firm specialising in turnaround. We understand that there are good reasons why banks do not initiate a turnaround or recommend one to their clients. They mainly relate to fear, fear that it may result in financial risk to the bank or damage to its reputation. This fear is valid in a world that wants to blame and possibly sue someone. And who could blame them if it goes wrong? Creditors who aren’t paid, employees who lose their jobs, or they may attract some bad press. A big risk.
A further reason for a lack of engagement in turnaround is the view that banks no longer behave as long-term partners with a client. The bank-client relationship has become more transactional. This works both ways, why should a bank invest further time or money in a client who might take their business away after the business has recovered?  
Business rescue and turnaround focuses on survival whereas all too often the insolvency practitioner makes more in fees out of a formal insolvency procedure. The banks understandably use their trusted (panel firm) insolvency practitioners to do reviews on their behalf but the system is flawed if the insolvency practitioner’s interest lies in a formal insolvency appointment. The banks know this and so the number of business reviews has declined, but it has not yet been replaced with an alternative that focuses on rescue and turnaround.
…..Or perhaps we in the turnaround profession need to get our message across more loudly and clearly?
 

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

Update

In view of our comments in the last item it is no surprise, therefore that the struggling music, films and games retailer HMV has announced today (December 13 2012) that it is in talks with its banks, following a 13.5% reduction in sales in the six months to October and amid fears of a “probable” breach of its banking agreements next month.
Whether new initiatives put in place by the company’s new Chief Executive, Trevor Moore, who took up his post in September, will be enough to help HMV take advantage of the run-up to Christmas to significantly improve on sales remains to be seen. Like many retailers it will have December deadlines looming.

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Banks, Lenders & Investors General Interim Management & Executive Support Rescue, Restructuring & Recovery Turnaround

Employee Equity can Improve the Chances of a Successful Restructuring

Businesses and the UK economy are under pressure from inflation thanks to increased taxes, such as VAT, and commodity prices and also pressure due to declining sales thanks to the reduction in consumer spending.
The current situation is as there has been a considerable amount of wage restraint in the marketplace with employees more concerned about keeping their job than earning more. This fear of job loss however does not apply to all staff, where retaining certain key employees is crucial as their loss would have an adverse impact on the business.
This is a common problem for restructuring advisers who need to solve it when dealing with companies in financial difficulties. When a business is in financial difficulty management often seeks to reduce staff costs such as by asking employees to take a pay cut in order to help the company survive and to keep their jobs.
Many attempts at restructuring insolvent companies fail due to flawed restructuring strategies and an inability to get the support of staff for a realistic solution. In the case of the Rover car company the opportunity was there to restructure the company using the £500 million dowry from BMW. But management failure and a lack of ownership of the problem by staff and their union representatives contributed to the company failing five years later when all employees lost their jobs.
Employees tend to be more concerned about the survival and future viability of their jobs than most other stakeholders. Banks and lenders tend only to be interested in the security of their outstanding loan, and shareholders often sell their shares or just ‘hang on and hope’ without further investment.
Involving employees in the development of a restructuring plan instead of imposing decisions on them can bring about solutions such as real cost savings and flexibility.
This notion of giving employees a greater say in their future exists in other countries, notably in Germany where employees’ representatives sit on the board of directors, and in the USA where unions like the Teamsters often hold shares in their member companies and are actively involved in strategic decision making.