Turn ambition into achievement

Venturn Amend, Pretend and Extend banking.

The bank’s apparent strategy to lending is to amend facilities, pretend that things are ok, and then extend the facility when things get tough. Is this right for the UK economy?

We are through the worst of the recession, and yet UK insolvencies are still low and companies are battling on. In part, this is due to the response from HMRC which we discussed in our previous articles HMRC Time to Pay arrangements and HMRC Top Tips. However the other very significant influence is the response from the banks.

To date in this recession, the UK bank workout teams and business support teams haven’t been busy. This is evidenced by the perhaps surprising fact that the UK turnaround practitioners and turnaround interims themselves have not been busy.

A common response to the recession has been to simply ‘fiddle’ with bank facilities terms and amend their lending. In many cases this is correct, but there are certainly cases where the underlying business issues, often called the operational turnaround have not been fixed. This fools everyone as we then pretend that things are going well, and that we can continue in this manner until the end of time. Sadly, this isn’t the case as underlying performance problems always catch-up with you.

Companies are faced with an important choice over the coming year ahead, they can hope that things don’t get any worse, and then rely upon their bank to extend their facility if things get tough. Or, your bank could give you more time to pay loans or reduce overdraft facilities. However, when sales output increases, the working capital gap becomes harder to manage. History shows that more companies run out of cash and go bust during the recovery cycle than in the recession itself as they can’t fund new business when customer demand returns. An alternative is to take control of the situation yourself, and fix the underlying issues, turnaround your fortunes and prevent cash flow issues from dictating your destiny.

This amend, pretend, extend strategy is now being talked about within the distressed business circles. It has been acknowledged that this strategy resulted in lower than normal insolvencies that we’ve seen through this recession.

I am now however hearing talk that this policy is coming to an end, and that the banks are starting to take action and release some of the companies from their portfolio, either through selling off their debt cheaply, forcing them to refinance, or forcing them into insolvency.

Either way this means that there are going to be some changes in the corporate marketplace for mid-tier corporates and small SMEs. This isn't perhaps unsurprising as there is a lot of stress out there.

Anecdotally, everybody talks about it still being difficult to trade, so when you put all of these factors together, it doesn’t sound like we are out of the woods just yet.

Further reading

Stephen Moon, Venturn Ltd. October 2010

Read more of our articles