Inside Track by Mark Stretton
It is one of the first questions senior executives ask of each other these days: “so, what sort of debt problem have you got and how are you dealing with it?”
Occasionally, one of those under interrogation will look back blankly, denying any knowledge of a debt problem. But then they are either lying or just weren’t trying hard enough before the world changed.
Apologies for returning to this subject – and not for the first time – but it is a massive issue for the sector. And seismic activity is afoot. For my money, it began last week when the banks behind Novus Leisure undertook a debt-for-equity swap.
From what I can gather, Barclays and RBS effectively halved the debt on the group’s balance sheet in return for a majority stake in the operator of 40 high-volume bars, including the Tiger Tiger brand. The process saw the holding of Cognetas, the private equity group that acquired the business in 2005, boiled down to a minority position.
Without wanting to be accused of peddling hyperbole, this genuinely is history in the making. This is how the excesses of the last cycle before the credit crunch hit, which induced this recession, is playing out.
Excess debt is a massive global issue and similar activity is underway at a slew of companies in a raft of sectors – be it car manufacturing, commercial property or financial services. In some cases it is not just whole companies that are in need of restructuring, but whole industries.
In leisure, every segment is feeling this debt problem: health and fitness, cinemas and bingo, hotels, caravan parks, gaming, pubs, clubs and restaurants.
Of course some companies are completely unaffected. But what is certain in this market is that the exercise undertaken last week at Novus Leisure will not be isolated. More such processes will be unveiled in the coming weeks.
Those with solid operating businesses must get debt down in order to establish a platform from which companies can move forward. Banks will continue to effectively replace private equity as owners, and management teams, if well regarded, will be re-incentivised.
It is also worth noting, in case anyone missed it, that some of the banks involved in sorting through this problem are technically balance sheet insolvent themselves, propped up by the government, and therefore the tax payer.
The tax timebomb
BDO’s insolvency expert Shay Bannon last week warned of a “tax time bomb” facing UK firms.
Speaking at a restaurant and bars forum organised by BDO, Barclays and Fourth Hospitality, he spoke of the 140,000 companies that had deferred tax payments to HM Revenues and Customs (HMRC). He said that in light of the downturn HMRC had been agreeing deferments and repayment plans “willy nilly” and was almost acting like a bank, granting unsecured loans.
Bannon said that as of March 2008 some £17bn of tax was unpaid, with most of the deficit attributable to firms rather than individuals, and “god only knows what the number is now”.
He said that the softly-softly approach of HMRC was changing and with that would come a reality check for UK firms, with many facing insolvency. BDO predicts that the business failure rate will almost double in two years, rising from 22,600 firms in 2008 to 32,200 this year, to 40,400 in 2010.
It points to a dramatic lag in business failures, seemingly exacerbated by HMRC.
If all this feels a bit depressing, it’s important that we take this in contect. So, let us leave the last word to Andy Bassadone of Cote Restaurants, who – speaking at the same forum – respectfully warned that insolvency practitioners, the so-called coffin collectors of the business world, tended to have a skewed view of life, because they spent so much time in the sector’s life support ward.
He said: “I have a friend in the police. All police take a rather dim view of people and society in general, because they only deal with the dregs. It is the same for these guys at professional services firms – they spend their whole lives dealing with distress and broken businesses.”
