Pending Recession and Company Crisis Management: New Risks This Time

This is the text of a Press Release issued in January 2002

Stephen Hiscock, who set up the TSB Bank Commercial Intensive Care Department in 1991, was asked why company finances will have to be handled in a different way this time. He explained the new complexities, after first saying why, in some ways, life will be easier.

'Here are some good points:

The effect of an economic downturn on individual companies takes time to develop. The fact that fewer people are spending in airport shops now, and not staying in London hotels, is slow to affect the spending habits of those in apparently unrelated industries. That gives company managers time to plan, and draw on previous experiences.
The banks took a considerable amount of criticism in the 1990s, much of it unjustified in my opinion, but they are now more positive about actively finding ways to help.
Leading financial institutions are putting the right people in the right places, and are ready to meet the companies who are planning ahead.

BUT

There are four fundamental differences that are in serious danger of being overlooked.

The range of people with an interest in the fortunes of many companies at risk is much wider than it was. This brings political as well as financial issues for managers to face. External investors will only be a source of new money if handled with great care. Joint venture partners can be a hindrance as well as a help. Employee share schemes bring risks for the staff, as well as rewards. Out sourcing means many businesses, or their customers, have key underlying government contracts: responses to problems may be slow, or politically rather than financially motivated.
Investment funding has used a broad range of instruments and layers of financial stakeholders. Equity, equity linked bonds, other mezzanine finance with a higher yield, bonds, debentures, secured and unsecured bank debt. These have proliferated mainly due to the number of Management Buy-Outs seen in recent years. They average around 600 a year, but the funding committed has increased substantially, from less than £2bn in the second half of 1992 to £15bn in the second half of 2000. All these relationships have to be managed carefully if they are not going to precipitate failure. Better, they can be part of the solution.
Finance directly related to trade has taken off. For example the amount committed by members of the Factoring and Discounters Association rose by 26% in 2000, to £6.2bn. This has been a significant benefit to many companies, but the main disadvantage will now become very clear to them - the facility available contracts as business contracts. If costs are not equally flexible, and they rarely are, problems can emerge very quickly indeed. This recession could be the factoring industry's first real test. Financing debtors alone makes it difficult to be flexible, but that is not to say that the factoring and invoice discounting specialists will not be able to respond. Part of the answer may lie in stock finance, but stringent controls and high fees are likely to be seen.
The economy is much more focussed on service rather than manufacturing industries. Service industry assets (hotels are a very good example) are usually valued based on the income they generate. Thus as income is squeezed so the value of the lender's underlying security also decreases. Banks are not in the business of holding assets in the hope that they may increase in value again, so they have to put refinancing pressures (or 'For Sale' signs) onto previously good customers.

The result is that companies will have to be far more proactive in finding a solution with their financial backers. To do that they will have to understand the problems from a wide range of different perspectives. First stop must be the lead bank, which will have many of the skills needed. However, it may have neither the scale of resources or the self interest in the particular case to help. Independent expertise is available, from HMC's network and others, and should be sought without delay.

Return to Articles

Return to Menu