As lessors face the troubled waters that are the trading
conditions of 2008, defaults and insolvencies are once again on the
horizon.
For many in the industry, lessees in financial difficulty are an
inconvenience that is best dealt with by repossession. For others,
however, a corporate in financial distress is an opportunity rather
than a burden.
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Turnaround finance (TAF), a specialism which has its provenance
in the US, first saw its appearance in the UK in the corporate
rescue culture that came about with the last major slump in the
economy in the early 1990s.
Lessees are poorly prepared
The Society of Turnaround Professionals (STP) was formed in 2000
with the task of rehabilitating under-performing companies within a
very wide range of industry sectors and many different types of
ownership structures. It has 200 individual members and 28
corporate members, all with finance as a core skill set.
Chief executive, Christine Elliott tells Leasing Life that a
recent poll of STP members revealed that only some 4 per cent
believe that UK firms are well equipped to deal with a downturn in
the economy. Over half (52 per cent) think that firms are poorly
prepared.
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By GlobalData“It is over 15 years since the UK’s last major downturn,”
Elliott says, “and many of today’s business managers and owners
have not had to deal with the consequences of softening demand and
limited credit availability. Being able to successfully deal with
these more adverse conditions will require businesses to focus on
their cash flow, costs and markets.”
Elliott believes that by Q3 2008 the financial services,
automotive and retail sectors will be “under severe strain”.
“Where finance packages have been agreed we are now seeing
lenders seeking to extract better terms and re-schedule
agreements,” she adds.
A growing problem
John Jenkins, chief executive officer of GE Commercial Finance’s
Business Finance division says: “Recent interest rate increases,
increased tax burdens and fuel inflation have taken their toll on
many companies. This, in turn, has limited their discretionary
spending in many areas.”
Jenkins also finds that companies are approaching GE and seeking
assistance – very often since their bank credit lines are not as
flexible as previously.
State Securities, owned by Five Arrows Leasing, part of the
Rothschild Group, has maintained its TAF division since the 1990s.
Sales director Andrew Bullard explains that an unusual feature of
the present market downturn is that insurance companies are
limiting their exposure to risk by limiting their cover to certain
customers.
“This is causing a knock-on effect on companies’ cash flow – and
then on to that of their suppliers,” he says. “There is ample
evidence that lenders are restricting what they lend and to whom
they lend it. They are also seeking larger deposits and higher
rates.”
Different this time round
Experience has shown that after debtor finance; asset finance,
stock finance and structured finance are the easiest facilities to
secure in a TAF project. Less commonplace routes to secure support
are traditional bank finance, equity finance and access to the
capital markets.
“Using alternative forms of finance, such as asset-based
lending, can play a significant role in helping some firms release
cash tied up in assets such as invoices, plant and machinery,
commercial property or even intellectual property,” Jenkins
explains.
State Securities has a greater selection of TAF products this
time around.
“Whereas previously we had one or two products to offer lessees
in distress, and outsourced others to specialists, now we can
provide a full suite of products that can turnaround a company.
These include bank debt finance, property finance (either short or
longer term) and small firm loan guarantees,” Bullard said.
Elliott added: “Over the last few years while the economy has
been benign, asset lenders have been quite inventive. They have
manoeuvred close to businesses and seen how they work. As a result
asset-based finance has emerged as a principal solution amongst the
suite of products on offer.”
Prevention is better than cure
Like most other lenders Jenkins expects the economy to soften
during 2008 and he sounds a caution for companies, emphasising the
importance for companies to act early before problems arise.
“Seeking advice or guidance of a seasoned professional can help
businesses focus on ensuring that they have the right
organisational, cost and financial structures to see them through
more difficult periods,” Jenkins says. Elliott agrees and says:
“Companies should be developing turnaround skill in-house in
anticipation of a downturn. The lessons from the past are there to
be learned.”
