Loans: living on borrowed time

Loans: living on borrowed time

As banks tighten up their lending practices, companies with a good record should be fine - but those that are struggling could find the rug pulled beneath them

With the financial markets still in limbo, businesses at the coalface of the
British economy have braced themselves for the fallout, but have they prepared
for banks tightening up the purse strings?

Inter-bank lending ground to a halt earlier this year as market confidence
imploded, but how the business arms intend to deal with their clients is still
unknown.

‘They’re certainly tightening up their lending practices,’ said Lee Manning,
one of Deloitte’s business recovery point men. ‘They are revising the underlying
value of their customers’ businesses.’

Manning said that businesses’ only defence against banks moving the goalposts
when it came to renewing their banking facilities was a squeaky clean record in
terms of meeting their banking covenants.

The covenants are based upon companies meeting criteria such as earnings
estimates and their asset holdings, Manning said. ‘If they’ve got a committed
facility and they are delivering on the terms and conditions, they should have
no problem. For the underperforming businesses, that’s another matter.’

On the other side of the coin, Manning said that the only well-performing
companies that had currently been caught out were those who had facilities with
the Icelandic banks that have collapsed in recent weeks.
‘Everybody’s suffering at the moment,’ added Manning.

The continuing uncertainty in the financial markets is filtering down to the
wider economy, but there is still doubt as to what the future holds for
companies.

‘I don’t think we’ve yet seen the worst of it,’ said Nick Hood of Begbies
Traynor.

‘We’re in the eye of the storm, but we have no idea where we are going to be
in a month’s time.’

The governor of the Bank of England, Mervyn King, has already admitted that
we are in recession, but it remains to be seen whether banks will cut their
losses and call it a day.

There have already been some high-profile examples of banks refusing to bank
roll struggling companies. Wrapit went into administration after HSBC held back
on nearly £1m of funds. It emerged that the company owed the bank £3.2m.

‘It comes as no surprise that the volume of administrations is increasing:
the economic situation is testing even the strongest of businesses, let alone
those with weaker balance sheets,’ Deloitte said.

The expected numbers of failures is set to increase steadily in the period
after Christmas and New Year once the peak retail selling season ends, according
to the firm.

Hard times

The business services and retail sectors are really taking a battering.

Company collapses were up a staggering 266% compared to this time last year,
and up 32% on Q2.
With businesses looking to streamline costs there is less demand for temporary
staff – reflected in the 67% increase in recruitment agencies falling into
administration.

The property sector continues to bear the brunt with administrations up 28%
compared to Q2, and 61% compared to last year.

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