It started with the banks and problems in the US sub-prime market. As share prices plunged and credit became more difficult to achieve, many businesses placed projects on hold. Now it seems as if everyone is tightening their belts. But is the situation as gloomy as it is often painted in the press?

Whilst banks might be behaving more cautiously, the underlying risk is based significantly around corporate bonds traded on worldwide capital markets rather than bad debts arising on domestic credit transactions. Banks are spending time identifying where the risks lie. Whilst that has led to borrowing becoming more expensive between the banks, we should take some comfort that they are starting to audit their investments and beginning to calculate the extent of the problem. Once this is completed, some lenders will fare better than others and those who do should be able to offer more competitive pricing.

What is likely to be more of a concern is inflation arising out of the high cost of energy and food and the increased demand for these resources from developing countries which may lead to a slowdown in consumer demand.

However, a slowdown in house prices was inevitable and will hopefully lead to more sensible lending and mean that first-time buyers find it easier to step onto the property ladder.

Press speculation does not help by instilling a sense of panic in the business community, particularly when the headlines have a political slant. What is happening is that companies are belt tightening and if this means perhaps reducing marketing budgets and improving credit controls, then this does not mean they are facing ruin - on the contrary it brings increased focus to the business.

In the acquisitions arena, whilst there is likely to be less of an appetite for deals requiring debt facilities of £30 million plus, the banks should continue to be able to lend to established customers who require lower levels of borrowings. Banks, like their customers, will no doubt undertake increased due diligence but it remains a competitive market with plenty of lenders and venture capitalists out there.

If a lender is backing a long-term customer on a cash-out or management buy-out, then the appetite to do the deal should still be there as the identity of the customer and its business has not changed. Companies need to remember that the banks make their money from lending to customers – they cannot afford to close for business.

Contact: Keith Melling, Partner, DWF LLP
01772 556677
keith.melling@dwf.co.uk