Insider Business Club: business recovery & turnaround

Are interest rate rises likely to send more businesses under, and should
embattled FDs turn to specialist funds?

Nick Hood, senior partner at Begbies Traynor

I am not entirely convinced that for most UK corporates a quarter of a point
makes too much of a difference. What I think you do get is a psychological
impact, especially if we get another quarter point so we have had four interest
rate rises in seven or eight months.

Then you begin to get a change in psychology and that can be crucial from the
point of view not just of those people who are running businesses and paying
interest charges, but also from the point of view of all the other stakeholders.
Those in the financial community who will be beginning to look at some of their
risks and ask if this is as good as it was, should I be taking closer order with
it?

The other thing linked to that – talking over the last three to four weeks to
people who run the intensive care workout units at the major UK banks, the
clearers, and some of the asset-based lenders and specialist lenders – every
single one of them is saying that those units are busier than they have been for
quite some time and in fact they are gearing up staff-wise to deal with that.

One final point by way of background, we are seeing the very first sign of
leveraged buy-out failures – some of these sexy buy-outs over the last two or
three years with high multiples – and is potentially the first sign of what may
be happening towards the back end of 2007 when liquidity in some of these
specialist funding areas may begin to tighten. I don’t think anybody fully
understands what will happen if that process accelerates.

I think the banks are gearing up simply because, although they often sell on
their debt, they remain involved with these companies, they don’t walk away
altogether. I think they are just recognising the fact that they have got more
businesses, especially in the SME and mid-market sector, who are coming up on
their radar as beginning to experience problems.

What has happened is the financing funding market for corporates is moving
way down the chain, the market has changed from a situation where there would be
a close relationship between a business and it’s bank built up over the years
and a sense of loyalty.

Many FDs will have been experiencing the situation of being de-coupled from
their banks who close relationship with customers so that when things begin to
go pear-shaped, you will find that the clearing banks, for example, will happily
simply trade out of situation to a hedge fund and you may not even know that
your bank has sold your risk on. It makes a heck of difference to the
relationship.

Do business recovery specialists offer good value, and where should
struggling businesses go for help?

Duncan Swift, recovery and reorganisation partner at
Grant Thornton

One can only look at whether fees are excessive or not in the context of
value added service, whether it is the recovery and turnaround the expert
provides or whether it is the refunding or refinancing package that is put in
place.

You have to look at whether the business performance has been improved and to
what level. Has the business been saved and put onto a secure platform going
forward where it can develop and prosper with no further recalls to the
turnaround skills that we are talking of? That is an extremely difficult
question to ask.

If a business finds itself in difficulties the sooner this is recognised the
better. Ideally this should be through regular benchmarking of performance, and
as soon as there is some recognition that the P&L indicators show that the
business is going off course, compared to its peer group competitors, then the
sooner it looks at the options to tackle the underlying causes of
under-performance and the more likely it is to avoid the rocks of formal
insolvency.

It will also avoid the consequences of cash-flow crises and it can quickly
restore itself to the profitability of its peer group – if not better. In that
process there is a whole variety of stakeholders that it can tap for expertise
to help it along the way.

The likes of myself and Nick are obviously a professional group of
individuals who have the skills to help boards achieve the turnaround. Assessing
whether they are going to get value for money, businesses need some verification
that the likes of ourselves or indeed any other routes that are used to achieve
the turnaround represent value. They should verify that through their known
contacts in existing banking relationships. Banks have contacts through legal
advisers, who will know of the turnaround expertise that is available in the
marketplace and where to find good value.

As for stakeholders, the key thing is knowing which stakeholders you are
actually dealing with and what their attitude is to the position the business
finds itself in.

The flip side is that, that range and the great range of finance providers,
means that there is a large number of permutations for funding solutions, if
indeed funding is the root cause of the tight spot that the business finds
itself in.

And there is a huge range of permutations for funding solutions to be found
in the marketplace in the process of restoring the business to an even keel.

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