Business rides out the credit crunch

The impact on Western Australia of international financial trends, such as the sub-prime crisis in the US, and the collapse of high-profile east coast companies, seems to fascinate corporate finance advisers.

The consensus is that, while there has been a notable slow down on the east coast, in the west the market has been relatively cushioned, for now, from the downturn.

“It’s an interesting question to ask at this time,” said KPMG executive director Adrian Arundell, when asked about the current market situation.

“WA’s trying to figure itself out at the moment...we haven’t really de-coupled from the US or Europe as we thought we had, but at the same time we are sort of isolated from that.”

PricewaterhouseCoopers Corporate Finance partner Angel Barrio believes it’s a matter of art imitating life, with the media catching onto the now cautious environment that’s taking over from the wheeling and dealing.

“It’s a difficult environment to get things done; people aren’t saying never, just not now,” Mr Barrio said.

Some deals may be on hold but Carmichael Capital Markets executive chairman Craig McGown believes the glass is half full when compared with the 1987 market crash.

He said companies were highly leveraged back then thanks to entrepreneurs such as Alan Bond and John Spalvins wanting to control things.

“I think from a company point of view, it’s a lot sounder,” Mr McGown said about the present market situation.

“If you compare it to the 1987 crash, companies were highly leveraged because you had a lot of entrepreneurs owning companies, and those people didn’t want to issue a lot of equity because they wanted to control the companies.

“So the companies borrowed heavily...and I think these days people have taken the contrary view.”

These changed circumstances are reflected well in WA, according to Mr Arundell, who said the number of businesses he came across that were financially clean and had good management was double that of the east coast.

Attitude was also a key distinguishing feature for Western Australians, according to Mr Arundell, who estimated that about 25 per cent of people were nervous about the current market situation, while 75 per cent were going about their business.

“The reason I can say that with some conviction is we’re still doing deals in this market, we’ve sold a couple of businesses this year and we’ve got a couple of deals on the go,” Mr Arundell said.

While it may be business as usual for the state, there are certain differences between now and 12 months ago that investors and lenders look out for when parting with money.

Both Mr Arundell and Mr McGown characterised it as a return to simplicity and good quality companies following the complex, structured deals that prevailed during the bull market.

“There’s always money for good business. If you have a good business or assets, you’ll always find good capital for it whether its equity or debt,” Mr Arundell said.

For publicly listed companies that need additional funds to grow, raising equity on the market was one alternative, however in this current market downturn Mr McGown said pricing must be realistic.

“I think you’ve got to show that, firstly, you’ve got a good management team, secondly, you’ve got a good project or proposition that you are taking to market and, thirdly, that you’re realistic in pricing,” he said.

“So where people might say ‘my shares were trading at $2 four months ago and the current price is $1.60’, well you might have to be issuing stock at $1.50.”

Mr Arundell puts it in simple terms in relation to options for growth, with the first calculation being what a business’s current gearing structure is and how much it can bear before starting on the path to growth.

“It’s like anyone with a home; if you’re geared up a lot and you’ve got a completely variable home loan and you suspect interest rates might go up, well, just be cautious before you go buy that Saab or whatever, because you may be on the precipice of being able to keep financing your house,” Mr Arundell said.

“It’s really around assessing your absolute performance and your relative performance, and then its pretty simple strategic stuff. If you see an opportunity there, whether its to buy a business or to grow by doing some capital expenditure, once you’ve done you’re strategic plan, then for good businesses there’s always money.”

Securing the money could present another hurdle, with the weak stock market and the perception that banks have tightened their purse strings.

National Australia Bank general manager business and premium banking WA, Andrew Whitechurch, believes that is a common misconception.

“Certainly not from a broader NAB point of view,” Mr Whitechurch said. “I think what is occurring is the increased cost of funding that we’re experiencing in the capital markets we’re having to pass on to businesses, and I guess that banks aren’t willing to lend at the same rates they were previously.”

“So people perhaps perceive there’s a tightening up but certainly from a credit point of view we have had no change in credit policies and no changes in terms of who we would lend to, from what we had 12 months ago to two years ago.”

However Mr Whitechurch acknowledged that the due diligence process had become stricter over the past 12 months.

“I think it’s just prudent for people to perhaps do a little more due diligence than they may have done 12 or 18 months ago before lending, but also to make sure they’re getting adequate returns on what is now a scarce resource,” he said.

“Capital’s not as freely available; it’s not just that it’s more expensive, it’s actually at times almost impossible to get in the global credit market.

“With capital being scarce, organisations and banks are just a little bit more careful about checking out the organisations they’re lending to and the projects they’re lending for, but the criteria on which they assess them haven’t got any tighter.”

Finance broker Westminster National, which predominantly focuses on small to medium businesses, believe some banks have tightened up but that was a domino response from the eastern states following the fall-out from companies such as Opes Prime and Allco.

“It’s a little frustrating, to be honest,” Westminster chief executive Bruce Williamson said.

“The banks have certainly tightened up, their lending policies have tightened, they want greater margins; it’s very much a knee-jerk reaction [from the eastern states].”

In respect to greater due diligence, Mr Williamson believes small to medium businesses are paying the price for the fall-out from companies at the big end of town which may have not undergone a stringent due diligence process.

“What is really frustrating is that we have to provide a lot of data and information to get a relatively small transaction approved,” he said.

While some banks may be tightening their lending, Mr Williamson believes that, in the current market climate, it is better for businesses to seek additional funds from a variety of institutions.

“Our most successful clients are the ones that have stuck to the long-term plan and have diversified their borrowings through a number of institutions rather than having all their eggs in one basket,” Mr Williamson said.

He said that by going through a single lending institution, particularly in this nervous environment, more security was needed to obtain a loan.

“Traditionally what will happen is if somebody’s got an overdraft or commercial property loan and some equipment funding, the bank will take a charge over their business, over their residential property, over their commercial property and probably have three times the amount of security they require,” Mr Williamson said.

“They try and find more comfort by tying up more security so their risk situation is reduced; but that can also hamstring growth opportunities and investment opportunities for clients because they haven’t got any security freed up to leverage against to invest in other areas.”

He added that, if a business were to go through brokers such as Westminster, businesses can supply the lender a variety of covenants and requirements they have to meet to keep the bank happy.

“Those covenants could be in line with profitability or gearing or a number of different things,” Mr Williamson said.

“So by having them individually spread around, they tend to be stand-alone facilities and they don’t need to have the level of reporting requirements or compliance to continue on with their business.”

He said businesses could make themselves attractive to financial lenders by providing as much supporting information as possible, whether it was in relation to contracts or projects or things that were coming up, and doing well prepared budgeting and forecasting.