18 banking update
Where next for the south? asks Lloyds Bank Corporate Markets
In the past few months, UK growth has been coming under increasing pressure, with forecasts being revised on a regular basis, writes Steve Clarke, area director for Thames Valley & south, Lloyds Bank Corporate Markets. This has caused a great deal of uncertainty among the business community in the south, as well as throughout the UK and has a real impact on business borrowing, with macro-economic issues the biggest factor affecting demand for lending in the region
The issue of funding availability has been a matter of debate recently, so it is important to emphasise that banks are open for business and continue to lend. The current reduction in borrowing is a matter of demand, rather than supply.
... many businesses in the south are taking advantage of the current low interest rates to refinance their existing debt
The export market remains more buoyant than domestic demand, helped by stronger global trade activity and a sustained fall in the pound
The key differentiator for successful businesses looking abroad will be exchange rate management as this can easily eat into margins
The lower level of confidence in the market means many businesses in the south are looking to focus on cost containment, de-leveraging and building up their cash reserves. This is shown by the fact that there has been a reduction in large leveraged deals in 2011, as many companies are reluctant to borrow more while confidence remains low. The trend towards deleveraging is by no means specific to the south, and is common across the country. With deleveraging a priority, many companies are sitting on more cash than they have in the past and need to manage their cashflow effectively. These companies should work closely with their lenders to ensure that they are getting the best returns on their cash.
Despite the reduced appetite for additional borrowing, many businesses in the south are taking advantage of the current low interest rates to refinance their existing debt; this is enabling them to lock into fixed rates, which provides a degree of certainty in the event of future interest rate rises.
Generally speaking, recent funding deals have been lower in value, but the volume of deals is growing. As an example, Lloyds Bank Corporate Markets recently provided new bank facilities up to the value of £3.6 million to the Gap Partnership, a negotiation skills consultancy based in Berkhamsted, which enabled them to fund a partial management buyout.
Of course, there will always be businesses that are more successful than others as market conditions change. We are, however, seeing a number of attributes common to those companies that are succeeding
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in the current climate, chief attributes are: a robust capital base, a sound market position, good cashflow management and a strong management team.
Many prosperous companies in the region are also looking to expand and diversify their income streams through international markets. The export market remains more buoyant than domestic demand, helped by stronger global trade activity and a sustained fall in the pound. Both total and export sales are expected to rise further in the next six months. Therefore, other economies may recover quicker, so better businesses will have positioned themselves to take advantage of this. The key differentiator for successful businesses looking abroad will be exchange rate management as this can easily eat into margins, something the government’s Export Credits Guarantee Department is providing support and guarantees on to drive growth in this area.
Overall, it is likely there will not be a significant uplift in demand for funding for the UK during the next six months. However, with valuations now at sensible levels there does appear to be more activity in the M&A market, especially at the lower end, as businesses seek to consolidate and position themselves for growth. Even though times are difficult and many businesses in the south are under pressure, for sound businesses with a strong track record and good management there is available funding to support growth.
Details: Steve Clarke Area director 07920-207685
Steve.Clarke@
lloydsbanking.com www.lloydsbankcorporatemarkets.com
THE BUSINESS MAGAZINE – SOLENT & SOUTH CENTRAL – OCTOBER 2011
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