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Monday, 5 October 2009

Hard Times

Is your business finding it hard to raise funding? According to the IMF it's going to get harder, but more on that later.

A report published today by the EEF manufacturers’ organisation, says that innovative companies find it harder to get funding and that there is a poor understanding in the financial sector of how and why manufacturers invested in innovation, which left better performing companies struggling to access credit.

The obvious riposte is that companies that rely on technical innovation may not be as good at writing financial proposals or defining their strategy as their less innovative competitors who may have other strategies for survival. Moreover, technological innovation implies higher risk, so the nearly one-way bet for lenders (slight margin over cost of funds upside versus total wipeout downside) doesn't look so good.

Anyway, the real reason for looking at the report is that 40% of companies had found it harder to get bank finance in the past 12 months and none had found it easier. Presumably many of the other 60% hadn't actually needed to ask the bank to increase their credit lines or extend the term of their facilities, because according to the IMF, it should be getting harder.

According to their Financial Stability Report, the UK banks capacity to lend, in other words, the total amount of credit that they are able to supply within limits permissible under capital adequacy regulations has fallen 8.6% in the last year. This isn't new lending, but the total amount they are able to lend, so total credit capacity has fallen and the banks can't start issuing more credit until either existing facilities are repaid or they issue more Tier 1 capital.

But if that sounds bad, the banks credit capacity will decline by 4.5% by next year according to the IMF. But it just gets worse. Michael Geoghegan, head of strategy at HSBC, thinks that the FSA will require banks to hold Tier 1 core equity equal to 10% of risk assets. At the moment his bank has more than 10% Tier 1 capital, but only 8.8% core Tier 1 (real honest to goodness ordinary shares), so for HSBC that would be a further 11% reduction of credit capacity without a share issue, and HSBC is relatively well capitalised compared with other UK banks.

Meanwhile, banks are flush with cash supplied by government debt buybacks, but have no capacity to lend it out to 100% risk weighted counterparties.

Well if you can't borrow from the bank, why not issue shares. Aviva have just a announced plans to list of its Dutch subsidiary Delta Lloyd, tol raise about £1bn before the end of the year, the biggest initial public offering in Europe for at least 18 months. Except that Delta Lloyd isn;'t your typical IPO, having been around in one form or another since the Napoleonic Wars.

For the rest of the world's businessmen, who float companies that have been set up in their own career span, the volume of global IPOs has shrank dramatically after the financial crisis began towards the end of 2007, collapsing completely after the failure of Lehman Brothers twelve months ago.

The total value of IPOs across Europe dropped 83 per cent from €80bn in 2007 to €14bn in 2008, according to a PwC, but so far this year US and European IPOs combined have raised only €4bn.

But to put that number in perspective, that is about the same as the UK government needs to borrow every 6 working days just to keep its vast army of MPs, bureaucrats and other public sector workers in pay and provisions.

So here is a graph showing the ratio of the annual government budget deficit divided by the value of IPO's on the London Stock Exchange. The latest figure shows that while the government borrows like crazy, nobody is investing to ensure that money can be repaid in the future. If politicians don't get the message soon, there is no hope for the rest of us.

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