BusinessCorporate FinanceCity in a spin over debt trading

City in a spin over debt trading

Survey of FTSE250 finance directors voices concern over financial institutions selling debts to third parties

Tension is building between finance directors and lenders, after a survey by
Close Brothers revealed that 63% of FTSE250 FDs were unhappy with their
company’s debt being traded by lenders.

Debt trading involves a lender selling on a client’s debt to another party,
such as a hedge fund, and is a relatively new phenomenon in the UK market.

Fenton Burgin, director of the Close Brothers debt advisory group, said
because trading debt was a new development, FDs still view it with suspicion.
‘Many finance directors have recognised the growing prevalence of debt trading
among UK financial institutions and view it as a negative development,’ Burgin
said.

‘Debt trading in mid-market companies has only been happening for the past
two years, so FDs are still adjusting to the trend.’

Harvey Hoogakker, assistant director of debt advisory services at Ernst
& Young, said debt trading was viewed with some scepticism because the debt
was typically sold on when companies were experiencing difficulties.

‘There is a school of thought that says buyers of debt take on distressed
loan books with view to forcing a company into receivership and seizing assets
that the debt is securitised against,’ Hoogakker said.

The Close Brothers research also revealed that 70% of FTSE250 FDs now saw
debt as a commodity, suggesting that relationships with lenders were secondary
to gaining the most competitive pricing on their lending.

Hoogakker said this trend was partly caused by banks having to off-load some
debt risks and could cause problems in the long-term.

‘When debt is sold on, a company no longer has an established relationship
with its lender and this can make it harder to work out repayment adjustments,’
Hoogakker said.

These difficulties, brought on by the breakdown in relationships between
lenders and clients because of debt trading, is set to continue as more
companies look to debt as opposed to equity as the preferred method of raising
finance.

Close Brothers found that the FTSE250 FDs surveyed were comfortable with
holding high levels of debt. The average gearing was 4.1 times earnings before
interest, tax and depreciation (EBITDA), up on the 1.75 times the EBITDA figure
revealed in a Close Brothers report in 2000.

Some companies said they were prepared to take on debt up to eight times
EBITDA.

Burgin said the high levels of debt was a result of competition from private
equity firms.

COMPANY REPORTS

Oil company increasesdebt facility, while card manufacturer switchesyear-end
date

FTSE250

A debt package worth £325m has been put in place by oil company Venture
Production
. Negotiated with the Royal Bank of Scotland, the package
replaces its existing $295m (£169.1m) syndicated debt facility. The increase in
the debt facility reflected successful growth over the last three years and
would finance potential acquisitions and development of its current asset base.

FTSE ALL-SHARE
Clinton Cards
has moved its financial year-end from January to July to
manage market expectations better. In a trading update the company said its most
profitable month, December, fell into the 11th month of its financial year,
which had ‘always presented a challenge in managing expectations throughout most
of the financial year’. As a result, Clinton Cards will report over an 18-month
period to July 2006 and issue a second interim statement in January 2006.

FTSE FLEDGLING

Airline transport company PlaneStation has suspended its shares
after failing to secure additional finance facilities. The group has battled to
sustain passenger numbers on EUjet, its low-cost airline based at Kent
International Airport, and was forced to sell off assets to fund the cash
shortfall. PlaneStation said it was expecting ongoing support from its lenders,
but had since been informed that it would no longer be able to secure additional
facilities.

AIM

Freeplay Energy, the electronic and electrical equipment
company, is anticipating a $1.1m (£631,003) reduction to revenues for the 26
weeks to 30 June 2005 after the appointment of a US distribution partner.
Freeplay will now only recognise revenues when goods are shipped from its
distribution partner’s premises.

Oil Quest Resources has changed its accounting reference
date from 31 March to 30 June. It said the extension would enable the accounts
to better reflect the ongoing business of the company, which is now focused on
oil and gas exploration and development in the UK.

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