Since the credit crunch of 2008 corporate recovery amongst UK businesses has become common place. British banks have been accumulating equity stakes in hundreds of ailing companies they have lent to. It’s a trend that looks set to end with disastrous consequences for many businesses.
With economic conditions worsening across the euro zone, banks are pulling back their support from struggling companies, putting many more at risk of administration and leaving lenders themselves facing hefty losses on loans.
‘It seems they would rather put the businesses into administration and get back what they can. One year ago they might have taken a punt on the equity,’ said Paul Daccus, principal at private equity group Sun European Partners.
The forced sale of Luminar, the former London-listed night clubs group, is a sign of the mood. The owner of the Oceana and Lava & Ignite clubs was put into administration in October, when its lenders Barclays, Lloyds Banking Group and Royal Bank of Scotland cut credit lines. A sale last week will lead to them only recovering a fraction of their loans. Corporate recovery advice may have helped this company get over this credit line issue but like many companies the signs were ignored and it was left too late.
Some of the banks argue their approach to handling distressed companies hasn’t changed; it’s more that the economic conditions are gloomier.
‘If we can see a route back to value we will always back ourselves to do that. That hasn’t changed. What has changed is that we are in a very uncertain business environment which makes forecasting with any accuracy extremely difficult,’ said Graham Rusling, head of credit risk and business support at Barclays Corporate.
With the path to corporate recovery looking longer and trickier to read, banks run the risk of holding companies for longer. Higher costs for holding equity that will come under Basel III regulations are also acting as a severe disincentive for banks to take control, or to plough more money into the companies they already hold. It all strengthens the argument for banks getting out earlier if they can.
If your company has concerns over revenue streams or credit lines being cut and you see this a ‘real’ threat to your business, then you must act immediately because it can quite literally happen over night and a back up plan through sound corporate recovery advice, could be the life or death of your company. Think about it as going to see the doctor when you get symptoms of a heart attack, instead of waiting for the heart attack to happen. For more information on how Burton Sweet Corporate Recovery can help your business please contact us.