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Apr
3

Further questions need to be asked

 
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In our last blog we highlighted the case of businessman Michael  Hockin’s 15-month battle to be allowed to sue RBS over a mis-sold Interest Rate Swap (IRS) which added over £600K to his company’s annual repayment bill to the bank.

The High Court ruled in his favour even though his company had been put into administration and, as mentioned, the administrators had declined to pursue the bank for the benefit of creditors.

We’ve found an interesting little note on the Financial Conduct Authority’s (FCA)website regarding reviews of  a bank’s mis-selling of an IRS, which clearly states that businesses in administration are (our italics) eligible to participate in the review:  http://tinyurl.com/pgqsr9p  

“…when banks invite businesses in administration to submit any relevant information…..we would generally expect administrators to offer the former directors or shareholders the opportunity to put forward their perspective.

“However, it will be the administrators and not the former directors or shareholders who will engage with the banks during the review.”  (our italics again)

We have previously questioned the conflict of interests between panel firms advising directors and their relationship with banks. Is there another potential conflict between panel firms representing banks and their duty to unsecured creditors? These issues were not included in last month’s review by the Insolvency Service of the regulatory regime and fee structure. A missed opportunity.

Banks, Lenders & Investors, General, Insolvency, Rescue, Restructuring & Recovery, Turnaround , , , , , ,
Apr
1

High Court ruling on mis-sold IRS gives businessman the right to sue RBS

 
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As time goes on more and more murky behaviour by the banks in their treatment of SMEs over Interest Rate Swaps (IRS) is being revealed.

It has been two years since the lobbying group Bully Banks first highlighted IRS mis-selling (IRS are also sometimes referred to as Interest Rate Hedging Products- IRHPs).

As a result of their efforts, and the Tomlinson report into the behaviour of RBS, the Financial Conduct Authority (FCA) has been tasked with investigating the banks’ behaviour and administering a redress scheme to allow SMEs to reclaim their money.

Now a High Court ruling has given one businessman, Michael Hockin the right to sue RBS over a mis-sold IRS, even though the bank put his business into administration in a classic illustration of the behaviour highlighted by Tomlinson.

The company, London and Westcountry Estates, had had a loan that RBS converted to a 10-year IRS, adding an estimated £600,000 extra in annual repayments and an exit fee of £11 million that Mr Hockin said the family was never warned about.

One of the questions that needs to be asked is why the administrators of this once-prosperous business, Ernst & Young, did not pursue a claim against RBS over alleged mis-selling.

RBS meanwhile is quoted as saying that it had investigated Mr Hockin’s concern about mis-selling and found no evidence of wrongdoing by the bank

The case will now be heard in court. Hopefully the issue of why the administrators declined to pursue the bank will be given an airing.

Banks, Lenders & Investors, General, Insolvency, Rescue, Restructuring & Recovery, Turnaround , , , , ,
Mar
27

Are investors continuing to think short term?

 
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A week ago ASOS, one of the UK’s most successful online retailers, announced plans to increase its investment in its warehousing and its IT as part of a longer term growth strategy.

Capital expenditure would therefore increase from £55 million to around £68 million and the outcome in the longer term would be an increase in ASOS’ sales capacity by £1 billion. In the short term the company’s operating margin up to August this year would be reduced from 7% to 6.5%.

Almost immediately after the announcement was published ASOS’ share value dropped by 20%.

Surely this company was being sensible in planning for growth in the longer term.  Isn’t this kind of thinking exactly what the business community should be doing?

Here yet again, we would argue, is an example of the kind of short term thinking that is endemic among investors and other “rent” seekers.  Or are we missing something here?

Banks, Lenders & Investors, Business Development & Marketing, General, Rescue, Restructuring & Recovery, Turnaround , , , , ,
Mar
25

What help was the budget to SMEs?

 
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A post-budget vote in Kent by 100 business people revealed that 80% of them were more confident about the prospects for the economy in the South East than at this time last year.

But looked at closely, there was very little in the budget that was likely to make things any easier for the UK’s SMEs, which account for more than half our output and two thirds of all employment.

Admittedly, direct lending from government to UK businesses to promote exports was doubled to £3bn and interest rates on that lending cut by a third and business rate discounts and enhanced capital allowances in enterprise zones were extended for three years. But how many SMEs will benefit from these measures?

Admittedly also, some small builders may benefit from the extension to Help to Buy until 2020 and the “support” for the building of more than 200,000 new homes.

But there was not a word about the review of business rates that had been pressed for by so many businesses, not only High Street Retailers, in the days leading up to the Budget statement, nor about the previously oft-repeated promises to reduce red tape.

Given that the Chancellor himself has conceded that economic recovery is built on very fragile foundations is such an increase in confidence on the part of the businesses of Kent a case of too much too soon?

Banks, Lenders & Investors, Business Development & Marketing, General, Rescue, Restructuring & Recovery, Turnaround , , , , , , ,
Mar
20

Investigation of treatment of SMEs by banks – what next?

 
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We reported in a recent blog on the announcement that the Treasury Select Committee (TSC) had begun investigating the banks’ treatment of SMEs, covering everything from lack of financing to bullying.

The first session heard evidence from Sir Andrew Large, Laurence Tomlinson and the Financial Conduct Authority and on February 25 it was the turn of Prof Russel Griggs OBE, Independent External Reviewer of the Banking Taskforce Appeals Process.

However, according to reports in the International Business Times, despite the best efforts of his interlocutors, Griggs’ evidence was less than critical of the banks’ behaviour and in his view SMEs’ opinions about banks were “more about perception than reality”. Here are just a couple of quotes:

“I don’t think I have ever seen a bank which has deliberately gone out of the way to upset the customer.”

And:  “Banks have also provided a lot of training for relationship managers over the last two years as well. Yes, [they are fit for purpose].”

Details of further sessions and formal terms of reference will apparently be announced in due course.

Unfortunately scrutiny of the TSC’s schedule for the next month on its website currently shows no further sessions yet.

While clearly investigations have to be thorough, objective and careful, one has to ask how many more SMEs will perish as a result of their bank’s actions due to the time taken to seek redress.

Banks, Lenders & Investors, Cash Flow & Forecasting, General, Rescue, Restructuring & Recovery, Turnaround , , ,
Mar
18

Can SMEs afford to bid for public sector contracts?

 
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By coincidence on the same day that the British Chambers of Commerce (BCC) announced revised growth forecasts, predicting that the economy would overtake its pre-2008 crisis peak in the second quarter of 2014 rather than in 2016, an SME announced that it was pulling out of further involvement in a valuable contract with the Ministry of Justice (MoJ).

Sara Murray, founder of Aylesbury technology company Buddi, said in an interview with the Daily Telegraph that tendering for the contract to supply software and tags for tracking 24,000 offenders had eaten up nearly two years of the company’s time and cost £2 million to assemble the documentation required for the bid. The paperwork filled 13 large boxes delivered in two taxis.  It was the only SME to win a part of the 4-Lot contract.

Then came further MoJ requests for “thousands of pages of information” to be given to other bidders and requests to share Buddi’s intellectual property with other bidders.  Buddi also had to deal with constantly changing specifications until finally the demand that Buddi would do further development work free of charge. This was the final straw that triggered Ms Murray’s decision to withdraw from the tender process.

In 2005 Buddi was a start-up. When it began working on the bid it had 25 staff. While preparing the tender for this contract with the MoJ it was servicing existing contracts both nationally and internationally and focused on growth. It now employs 40 people.

Ms Murray said the company has tendered for and won work overseas and found their processes far faster and far less complex.  She sits on a number of Government advisory panels and is passionate about getting SMEs working with Government.

Government claims it wants to help SMEs grow, it promises to remove red tape, and it wants more SMEs to work with them. It seems there’s a long way to go.

If the BCC’s prediction is proved accurate, given Buddi’s experience one has to ask whether all this growth will be confined to the “usual big-company suspects”.

Are you aware of SMEs tendering for public sector contracts? Is there one bit of red tape above all others that you would like to see removed?

Business Development & Marketing, General, Rescue, Restructuring & Recovery, Turnaround , , , ,
Mar
13

Business Rates – time for a change?

 
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As the Chancellor’s March Budget statement approaches, calls for a complete overhaul of business rates have been growing.

The British Retail Consortium (BRC), several large manufacturers (including Tata Steel and Vauxhall), ex Tesco boss Sir Terry Leahy and a number of MPs have been among them. There seems to be general agreement that the current tax regime needs reform.

Some, principally the BRC, have put forward alternative suggestions, one of which is to replace the property-based tax with an energy tax.  There is no doubt that for High Street retailers the payment of rates, set at pre-2008 crash property valuations, has posed a particular challenge given the competition they face from online shopping and changing consumer habits.

But, as the British Chamber of Commerce has pointed out, business rates affect all sectors, not only retail.

The BCC is right to highlight the burden placed by this tax on all businesses. 

There will doubtless have to be a thorough review before any new system is introduced and perhaps now it is appropriate for a more nuanced approach to be considered.

There may be scope for a scale of charges tailored to different sectors of the economy, or tailored to the size of a business, or one based on the number of employees in a premises, which may achieve political as well as tax collection objectives.

We need to support both SMEs and employers to promote jobs and people on whom the economy is depending for growth.

Do you have any suggestions for the Chancellor on a fairer way of assessing business rates?

Business Development & Marketing, General, Rescue, Restructuring & Recovery, Turnaround , , ,
Mar
12

Should Private Equity be involved in High Street retail?

 
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2014 started with much media speculation that a variety of well-known retailers – or more correctly, their Private Equity(PE) owners were preparing to float on the Stock Market.

They included Fat Face (77% owned by PE firm Bridgepoint) Card Factory (owned by PE firm Charterhouse) and Poundland (76% owned by Warburg Pincus).

This resurgence of so-called “animal spirits” seems to be fuelled by a perceived improvement in consumer confidence, investor appetite driving the search for better returns than those available in a low interest rate debt market, the lack of debt available for refinancing businesses and the need for PE owners as investors to realise profits.

This may herald a resumption of the pre-2008 practice of PE buying out retailers, often as a public to private deal, repaying themselves by loading them with debt, and then flipping them back into public ownership.

The 2008 Global financial crisis put this practice on hold and indeed it has placed enormous financial pressure on some PE funds due to the lack of debt available for refinancing their acquisitions.

Indeed many PEs have ended up with burnt fingers, such as Guy Hands’ Terra Firma’s purchase of EMI,which defaulted on its debt to CitiGroup,  and US-based Bain Capital LLC (owned by Mitt Romney), which purchased the purchase of Toys “R” Us, which has seen a decline in revenue.

High Street retail casualties over the last five years have included Nicole Farhi, Comet, JJB Sports, Jessups, Blockbuster, Clinton Cards, Habitat, Focus DIY, Floors-2-Go, the Officers Club, Oddbins, Woolworths and MFI.  Some, such as Focus, JJB, Nicole Farhi, MFI and Comet were PE owned.

With banks having tightened up so significantly on lending in recent years PE sources of funding are inevitably more focused on investors such as pension funds and not surprisingly fund managers are generally risk averse being responsible for other people’s money.

Despite the economy picking up, the buy, refinance and flip PE model may not work in the way it did. The growth in online shopping, concentration of retail parks, intense competition and changing consumer habits may yet thwart many PE deals.

Banks, Lenders & Investors, Business Development & Marketing, General, Rescue, Restructuring & Recovery, Turnaround , , , , ,
Mar
11

Bully Banks fight back on behalf of SMEs

 
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The Treasury Select Committee (TSC) has begun investigating the banks’ treatment of SMEs, covering everything from lack of financing to bullying.

The investigation follows media pressure and a number of reports, including the Tomlinson Report into complaints about RBS, and details relating to the Financial Conduct Authority’s investigation into mis-selling of Interest Rate Swaps (IRS) to SMEs.

Arguably, though, the pressure for a thorough investigation began in December 2011, with the formation of Bully Banks, an independent organisation to lobby for investigation and action on the IRS scandal. Membership of Bully Banks has now reached more than 2000 and all are SMEs.

Bully Banks (www.bully-banks.co.uk) has campaigned for action to help SMEs recover their money, but this year it widened its campaigning following Tomlinson and the emergence of another potential mis-selling scandal affecting banks’ use of the Enterprise Finance Guarantee Scheme (EFG),  which we was covered in a recent blog.

The investigation by the TSC would suggest the group may have achieved its objective, at least partially.

The question is whether the TSC has the teeth to do what Bully Banks wants and if it does find evidence of bank mistreatment of SMEs, what recommendations would you want to see and what likelihood is there of the banks actually taking notice or acting?

Banks, Lenders & Investors, Business Development & Marketing, General, Rescue, Restructuring & Recovery, Turnaround , , , ,
Feb
27

Is another bank mis-selling scandal brewing?

 
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The full extent of the banks’ questionable behaviour following the 2008 crash has seemingly not yet played out as suggestions of yet another possible mis-selling activity surface.

Many SMEs are still awaiting compensation after being mis-sold insurance in the form of hedging products to protect them from potential interest rate rises.  Libor rate rigging is still under investigation and the recently-published Tomlinson report has prompted Business Secretary Vince Cable to refer RBS’ approach to dealing with companies in financial difficulty for investigation by the Financial Conduct Authority and the Prudential Regulation Authority.

Mr Cable is plainly going to be an even busier man following recent revelations in the Sunday Mail, the FT and the Times, that banks may also have been taking advantage of the Government’s five year-old Enterprise Finance Guarantee (EFG) scheme whereby they may have sought to repair their balance sheets at their SME clients’ expense.

Reportedly some SMEs have had their overdrafts cancelled by their banks who have then offered loans under the EFG scheme. The benefit for banks is that EFG loans do not require the same level of reserve capital as overdrafts but it is not clear whether this was the reason behind the withdrawal of overdrafts.

It seems that many banks have not fully explained the terms of an EFG loan.  Loans under the EFG scheme are intended for businesses that do not have sufficient assets or track record for a conventional loan where the scheme guarantees the bank 75% of any loans should the borrower’s business fail.

Unfortunately, many SMEs appear to have been given the idea that should they fail they would only be liable for repayment of 25% of the outstanding debt.  In fact they are liable for the full amount and the banks get the 75% from the Government ONLY after they have exhausted the recovery terms of the EFG loan which require security over the business assets and personal guarantees from director/shareholders. As such the government only pays out under the scheme after the company is formally declared insolvent and the guarantors are made bankrupt.

Banks, Lenders & Investors, General, Insolvency, Rescue, Restructuring & Recovery, Turnaround , , , , ,