Insider Business Club: the credit crunch

We have heard how bad the economic outlook is, should we all be so glum
and down in the dumps?

Paul Barry, head of risk management & regulatory compliance, IBM
Financial Management Consulting

Everyone is still trying to work out the answer to that question at the
moment and I’m certainly not brave enough to provide a solid answer.

But what we do see, and what I certainly see among the clients that I deal
with on a day to day basis, is a greater acknowledgement of the problems in the
US and the spread of the problems from the US.

So people are expecting the consumer impact of the credit crunch to be felt,
as well as the impact of increased oil prices, lowering house prices and less
availability of credit.

People are using the word recession. The terrible word is still not being
used in the European context but it is been used far more in a US context.

So in terms of the impact on that market people do seem to be concerned. The
most pro-active of our clients are taking action against that at this point in
time and starting to look at their costs.

As for the European impact, people are trying to work that one out.We see it
now, and we’ve seen historically whenever there is a down turn in the market, in
the equities markets and also in the debt markets there is a turn to quality,
there is a turn to safety. Therefore any shocks that come out of a system will
be magnified and people will turn away from stocks where they can’t absolutely
trust the figures that are coming out.

All of us in different business roles have experienced periods over the last
15 years where we have seen ourselves striving to get every penny in, and there
is a danger in terms of the quality of new business being signed suffering.

What do you tell clients who want to improve operational efficiency and
ensure they have liquidity when needed?

Martin McGrath, Grant Thornton partner

What I am seeing from the lending side is much more focus on tightening
existing deals. It is almost like this idea of getting in with a high leverage
and short cycle is stopping. It is more about getting in for the longer term.
People are saying: ‘Let’s maybe take a different position on the leverage.’

What that does to the business, especially as far as the chief operating
officer, chief financial officer or FD are concerned, is that it puts them back
in the position of acting as a business adviser to the business.

For the last couple of years we’ve been caught up in the days of Sarbanes
Oxley and back to the regulatory aspect of a finance function, and it now looks
like there could be an opportunity to go back to the mid-nineties when the
finance function was moving into more of an advisory type role to the business
as a strategic adviser.

From a business perspective what we would advise clients is to get into
working alongside the business with the lenders and build a relationship with
them, look at the longer view and actually make sure that the deals that they
have with financial institutions are solid and well understood. So that is one
aspect in dealing with the lenders.

The other aspect obviously is within the business, to start getting into most
of the reviews, be pro-active, be strategic and be prepared and look at all
aspects of your working capital and your infrastructure, both in the operational
and financial areas.

With too much liquidity around very complex deal structures that would
normally exist in very large deals were suddenly drifting into the mid-market.
Now is the return to normality.

How should businesses approach tough economic times and are there golden
rules everyone should follow?

Eric Anstee, founder of Anstee Associates and non-executive director
of Insight Investments

What is really crucial is this issue of looking at your own risk. The risks
in each business will vary, obviously by sector.

The positioning of each company will also depend on where it is in its
particular markets.

The thing any business needs to be doing is looking hard at your costs and
looking at your cash position. Ensuring that you have got your facilities in
place and that they are solid are all good general pieces of advice whether you
are large or small.

I don’t necessarily think the larger companies are going to be insulated by
some of these risks and my concern is that there will be certain sectors and
certain companies, that are exposed to the credit freeze.

There could be some regulatory risks for certain companies, but I think it
will depend on the scale and size of a problem.

Certainly financial services businesses are going to be affected and we’ve
already seen a shake up of the property market and that has had a knock-on
impact onto property funds.

I’ve been involved in a couple of companies where we have been forced to look
at new markets because we were worried about the downturn and I think there are
some good markets out there. We know about India and China, we know about the
growing markets. The Middle East is also doing well and I think there are big
opportunities there.

I genuinely think that there has been a very aggressive lending and push for
growth and I think that has caused a problem and we are all going to effectively
have to pay for it.

Chaired by Nicholas Neveling

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