Banks hold key to Crunch recovery

The post-Credit Crunch financial world is a very different place and printers will have to work hard to secure finance, finds William Mitting


When, two years ago, French bank BNP Paribas announced that it had been forced to close three of its funds as it was unable to raise finance in the short-term money markets - that sea of finance that had previously sloshed so abundantly around the shores of international financial institutions - the news attracted little coverage outside the business pages of the national papers. However, its implications were soon to hit headlines and businesses across the world: in short the Credit Crunch had begun.

According to former Northern Rock chief executive Adam Applegarth, that day - 9 August 2007 - was the day "the world changed". The world is still shuddering from the impact of that financial D-Day - the Credit Crunch has affected almost every business in almost every country in the world and, two years on, there is little indication that credit conditions are easing. That day was not just the day the world changed, it was the day the world changed for good.

The recession that we find ourselves in today was accelerated and deepened, if not entirely caused (depending on which camp you sit in), by the Credit Crunch and the subsequent banking crisis. The Catch-22 that is the latest phase of the crisis is that for the economy to recover, the banks need to lend to businesses, but for the banks to be able to lend, they need to repair their balance sheets.

It is this contradiction that lies at the heart of predictions concerning the length and depth of the recession. According to Dennis Turner, chief economist at HSBC, all the initiatives taken by the Treasury and the Bank of England (BoE) will fail to work as intended unless credit for businesses and consumers is readily available. He says: "If businesses with new orders cannot get the working capital they need, or households cannot get the mortgages they can afford, the current malaise will last a lot longer."

David Bunker of Close Print Finance agrees. "Businesses cannot grow without working capital and the banks play an essential role in providing capital. If businesses cannot access capital to grow, the recession could drag on for a long time."

Bad omens

In terms of a rapid return to pre-Crunch rates of bank lending, the signs are not good. Last week Mervyn King, governor of the Bank of England, warned that it could take "several years" before banks are lending normally to businesses and consumers again. But what does "normally" actually mean and should we really want a return to the lending practices prevalent in the period 2002- 2007?

During that time, cheap money, partly the result of artificially low interest rates in the US, flooded the banking system leading banks to lend money like it was going out of fashion. Little did they realise that it was. The number of bad loans made to businesses in the heady days of 2003-2007 is astonishing.

It emerged last week that writedowns on loans owned by Lloyds TSB (but predominantly made by HBOS prior to its acquisition) in the first six months of the year totalled £9.7bn. To put that in perspective, the total turnover of PrintWeek's Top 500 companies is £11.5bn. Add this to the £9.3bn lost in the previous six months and bad loans made by one bank alone dwarf the turnover of our entire industry.

However, Mark Halstead, red flag operations director at Begbies Traynor, says that the huge losses are the least of his concerns. "It is the banks that are making a profit and still not lending that concerns me. We have never had such a high level of enquiries in our brokerage division, but only about one in 10 deals are easy to get through."

Extra measures

Mark Nelson of Compass Business Finance agrees that credit conditions have not eased over the past 12 months, despite low interest rates and the apparent beginnings of a recovery in the banking sector. "There has been no easing of credit conditions, but everyone is getting used to what is required and the extra lengths that a business has to go to in order to attract finance," he says.

According to Nelson, and a view supported by other market participants, banks are seeking much more from businesses in terms of deposits and guarantees as well as tighter terms. "The banks are basically saying: ‘You have to commit yourself to the business if we are to do the same'," he says. "We are not going to see a return to the lending we saw in 2006 and that isn't necessarily a bad thing."

Indeed, the glut of lending is one of the key contributors to the current overcapacity in the print market. Businesses with flimsy business plans were able to invest in new kit boosting their capacity, but forcing them to drive down their prices to fill the machines. Many of these businesses have subsequently collapsed leaving the banks licking their wounds.

Consequentially, lenders are understandably and correctly more cautious than they have been, but it will take a long time to undo the damage done during the credit boom. Much of the talk is currently of a return to ‘traditional lending', where deposits and loans are in ‘sensible ration'.

Lending decisions have been devolved from the local bank manager to ‘quants' and data analysts looking at highly complex algorithms and risk profiles. In response, the Federation of Small Businesses (FSB) recently urged Alistair Darling to put pressure on banks to give more power to local bank managers. FSB chief spokesman Stephen Alambritis says banks must return to "relationship banking", where branch managers have more contact with local businesses.

He adds: "There should be a push towards the banks to go back to relationship banking to see whether they can use some of the profits, those that have made profits, to close their call centre approach and visit businesses individually and give a huge swathe of discretion to branch managers who know what's happening at the high-street level."

However, Halstead believes that it has been a long time since bank managers have made decisions on loans. He does think though that building relationships with customers will be a key issue going forward. "Over the past few years, loans were made on the basis of a company's figures. This will change - businesses will have to work harder and have more of a relationship with their banks to get credit," says Halstead.

Many commentators have also pointed the finger at the government for the current predicament arguing that initiatives, such as the recently launched Enterprise Finance Guarantee (EFG), have done little to boost lending. The scheme, which involves the government guaranteeing a proportion of a loan, was introduced in January 2009. Anecdotal evidence from printers and finance brokers is that banks are frequently seeking personal guarantees against EFG loans, which critics claim defeats the object of the guarantees.

In addition, a government committee established to investigate the effects of the EFG reported in July that, while it thought the scheme was working, banks were often pushing other services, such as factoring, over the loans. The committee said the onus was on banks to offer businesses a choice of lending options including the EFG if appropriate.

Despite its failings and slow start, there has been some lending under the EFG in the industry. Matt Kent recently secured £60,000 of finance from Lloyds TSB under the scheme to put towards his acquisition of Ridley Printers. However, such examples are few and far between and the scheme is widely seen as inaccessible to printers.

Mirror image
Banks say the downturn in lending is due to a lack of demand from businesses. Explaining why its loan book to SMEs had shrunk by £400m over the past six months, RBS's chief executive, Stephen Hester said that that a key factor was lower demand, a view supported by the most recent quarterly Credit Conditions survey from the BoE.

However, Close Print's Bunker doubts whether such arguments were anything more than "rhetoric". He adds: "Customers are being made to reduce overdrafts and credit availability is falling. It's a mirror image of the early 1990s."

Marcus Clifford of BPIF McInnes Corporate Finance adds: "Printers are going to banks for support and some banks are making things worse. My advice would be not to go to your bank before you have reviewed all options. In addition, banks are taking a long time to make decisions."

Despite the current challenges, lending inevitably will return to the market. Lending money is the banks' raison d'etre and, more importantly, a principal source of profit. "The banks' commodity is money," Halstead says. "They need to lend money and I expect to see banks coming back into the market by the first quarter of 2010. It won't be a stampede, but the banks are getting ready."

There is evidence that lending is returning: RBS recently supported Purbrooks by renewing its working capital facilities and the bank also supported the management buy-in at Pega Print last week.

Of course, there are other options out there. Clifford says that private equity houses are becoming increasingly interested in the print sector and have the funds to invest in businesses with clear and realistic growth plans. However, private equity investment does involve owners relinquishing equity - not an attractive prospect for all managers.

Two years on from that fateful August day and the world is still suffering from the binge on debt. Following the hangover that followed the party, a painful process of withdrawal is now being felt as businesses wean themselves off the debt addiction and lending levels adjust themselves to more sustainable levels.

"There was a fundamental flaw in the debt market," concludes Nicholas Mockett of financial advisers Europa Partners. "Levels of lending that were reached were not good for us." Indeed, the adjustment to the new world order may be painful, but it is necessary to create a sustainable platform for future growth."