Banks are increasingly withdrawing unused credit facilities from Britain’s biggest companies, according to a new study by consultancy Roland Berger – and many believe that this will cause serious damage to their finances before the situation improves. On the day that the Government announced plans to guarantee £20bn of loans for small and medium-sized business, it’s a timely reminder that their larger brethren are equally exposed to the slowdown in business lending…
The issue, according to Roland Berger, is that banks are looking to cut back their risk exposure across the board – so if companies aren’t making use of their entire credit facility, banks are taking it away from them. According to the consultancy’s study of finance managers at large firms, about one in three companies have experienced this, while fewer than half expect to be able to renew their current facility in the coming year. In addition, 55% have had their credit ratings downgraded, and 36% are paying higher interest rates on their debt.
Since most companies use their credit facility as a safety buffer, taking it away could have disastrous consequences as times get tougher: 55% said they’d suffered poor liquidity as a result, and 33% have already seen direct loss of revenues. What’s more, the majority of these finance managers don’t think matters will improve quickly enough: on average, they expect this credit squeeze to last another 19 months, but they reckon they can only survive another 17 months without ‘material damage’. And almost half reckon they won’t make it until the end of the year. Presumably, this could mean lower revenues, not to mention job cuts.
One unintended consequence of all this is that companies are desperately trying to make sure they use their entire credit facility: some are funnelling extra cash towards working capital, others are financing long-term assets, and others are sticking it in savings accounts – where presumably, it will earn practically nothing. Since this is clearly in nobody’s interest (money is being lent to businesses when they don’t actually need it, rather than being allocated elsewhere in the economy to companies who desperately need it), it’s hard to avoid the conclusion that the banks are rather shooting themselves in the foot here…
Meanwhile big companies are getting increasingly miffed about the lack of Treasury support, particularly since they’ve been largely ignored in today’s package of measures (most of them won’t be eligible for the scheme). So there’s another influential lobby that could be losing faith with the Government...
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