Articles & Updates

The world of banking has been making headlines around the world for over 18 months but one year after the collapse of Lehman Brothers, Banking and Finance Partner Andrew Gosnay gives his personal perspective on where we are...

At Pannone, we act for 18 different lenders which gives us a great insight into the different approaches being adopted to what is essentially the same set of problems to varying degrees.  We also act for a wide variety of borrowers and we therefore see the market from both the lenders' and borrowers' point of view.

Key points

• Margins up by around 2%
• Plenty of covenant breaches although few hard defaults
• Base rates and LIBOR have now converged
• Greater monitoring

"Open for business"

Many banks have trumpeted the fact that notwithstanding the market turmoil, they have remained "open for business".  Our experience is that the focus has been on looking after existing customers rather than seeking new ones.  We have seen very little "new to bank" business being transacted.

Re-pricing

Customers with scheduled renewals of facilities and those who have not been compliant with their bank's covenants have seen significant re-pricing.  Whilst interest rates have been at historic lows, banks have sought in negotiations to pass on costs through increased margins.  Negotiations have often been difficult and in some cases have resulted in damage to the relationships between customer and lender.

Interest rates

The divergence of base rate and LIBOR has meant that LIBOR became the favoured pricing rate for lenders as it more closely reflected their funding costs.

Relationship issues

At the height of the banking crisis some banks tasked their relationship managers with communicating to their customers to reassure them that their bank met all necessary capital adequacy requirements and was adequately resourced to meet all the bank's obligations to customers and others.  Recent revelations from government in relation to some banks have shown that this was either not the case at the time or misleading.  Relationship manager credibility has been severely tarnished in many cases and some banks have been forced to "refresh" relationship managers to try and rebuild customer credibility.

"Banks are looking for breaches just to charge us more"

There is no doubt that most banks have rigorously reviewed their customers and in the process identified covenant and other breaches.  These reviews have led to re-pricing and a tightening of documentation with steps being taken to try to de-leverage borrowers.  Where there is default, the banks have been keen to work with customers to re-covenant the facilities and ensure steps are taken to bring the facilities back into compliance.  This helps lenders from a regulatory and capital adequacy perspective.  It is also necessary for corporate customers to get a clean audit sign off.  Accounting rule changes have meant that even if the banks issue a waiver of a breach post balance sheet date, auditors still have to draw attention to the fact that there was breach in the statutory accounts and treat what may otherwise be term facilities as "on demand".  This can have an impact upon a company's credit status and ability for suppliers to get credit insurance.

Current trends  

• PLC's use of equity and bond issues to reduce bank debt
• Re-financing being brought forward
• Re-financing demand likely to peak in May 2010
• Tougher credit processes
• More legal and ancillary due diligence
• Tighter and increased documentation

Reducing debt

Listed companies are taking the opportunity to use rights issues and bond issues to generate funds to pay down bank debt and lenders are seeing large inflows of funds as a result.  However, in the case of non-listed companies sources of capital to pay down bank debt are often very limited and accordingly we are seeing more companies considering floatations.  We will also see a lot of businesses looking to change their banking relationship notwithstanding the disruption and cost for the reasons outlined above.  Additionally, it is forecasted that refinancing demand will peak in May 2010.

Banks' appetite for lending

Of course, banks will continue to lend as that is what they are in business to do but companies should expect greater commercial and financial due diligence to be done by lenders before they decide to proceed.  However the focus will remain on looking after existing customers and only the choicest of new to bank business will be considered.

Repent at leisure

Those who were overjoyed that they had "got the finance" and just signed the bank's documentation without proper review and advice have paid the price and hopefully learned the lesson that just signing is not a sensible course to adopt.  Yes a lot of bank documentation is standard.  However, banks are often willing to consider sensible operational and commercial changes to avoid unnecessary breaches going forward and giving appropriate headroom in covenants.  Those with invoice discounting lines have learnt some harsh lessons and now understand the degree of discretion that invoice discounters have in terms of selecting eligible debts and freedom to change customer concentration limits, advance rates etc.

Key messages

• Don't just sign what is put to you
• Stress test covenants and negotiate operational mitigations
• Bring forward your refinancing and start any finance discussions early

Communication with your lenders is key. Do not store up bad news or avoid difficult discussions.  Lenders don't like surprises and taking steps early can help find solutions that may not be available if left too late.

Andrew is a Partner in our Banking and Finance team. If you would like to discuss any matter arising from this article or indeed any other legal matter please contact Andrew on 0161 909 4517 or by email andrew.gosnay@pannone.co.uk or your usual contact at Pannone.