Not quite a safe haven, but calmer waters in WA

INVESTMENT banker Aaron Constantine said he laughed with a colleague when he saw two boats moored out at Marjorie Bay on Rottnest Island last week.

"That's the place to hide from all this," joked the Patersons corporate finance chief.

Even in normal times Rottnest is about as far removed from New York as you could find, and not just in the geographical sense.

Last week, the quiet retreat was even more so as the financial storm lashed world financial centres and dragged national governments to make previously unthinkable market interventions.

Popular among Perth's executive class for the October school holidays, the island's temporary population remained as calm as ever, despite the panic and calamity taking place across the globe.

Perth might be less than an hour's journey away by fast private boat, even less if you have your helicopter handy, but the events of last week did not create a mad exodus of investment bankers or corporate lawyers.

Perhaps it's the place or, maybe, the sense of sanctuary is catching.

Western Australia remains the most robust state in one of the most economically sound countries on the planet.

The realists on the island understood that things would be different when they went back to work on Monday, but whatever is going to happen in this state is expected to play itself out more slowly and more gently than almost anywhere else.

Mr Constantine reckons now is the time to make sure your "business is neat and tidy", with costs aligned with revenue and "realise that it's a different world".

His view was calm and detached, reflecting the mood WA Business News encountered across the board.

"We have not got the black plague running through the population," Mr Constantine said.

At this corporate level, the expectation is that a lot of the deals and financing activity will dry up for the next few months as investors and financiers reassess a situation that was becoming tight before early October.

Already described as a drawn-out crash, equity and debt markets have been tightening for almost a year, and high-profile banks collapsing or teetering on edge for most of the calendar year.

WA has had its domestic issues, but after years of bingeing on high commodity prices, the victims have been few and far between at this stage.

China was seen as the bulwark, its huge demand for minerals and energy insulating our resources-led economy from the difficulties caused by Californian property markets and Icelandic savings schemes.

But the stronger-for-longer viewpoint won't totally insulate us from events cascading around the globe. Commodity prices have slumped in most categories and China's growth is expected to be around 7 per cent, well below the levels that have fuelled WA's own heady economy.

While many commodity prices remain at historically high levels, there will be projects where the economics simply no longer stack up, at least to their financiers.

One developer to recently get a major backer, Grange Resources Ltd, shows that there are ways around the uncertainty.

Grange Resources is to merge with the Australian assets of private Chinese steelmaker Shagang, which wants to fund the development of its Albany project to supply feedstock for its mills.

CEO Russell Clarke said his local investors had been very jittery over the company's share price plunge when the markets dived, but reckons the Chinese remain rock solid, despite the volatility and a protracted foreign investment review process.

But the news isn't all good, and even a potential safe haven like WA is expected to have its fallout.

The slow motion global drama is going to play itself out here eventually, most likely over the next year or so as businesses leveraged to high growth, perhaps with bad management hidden by high prices, find access to cheap finance has been well and truly cut.

One area of concern is the mining services sector, which has undergone rampant growth on the back of lucrative contracts - leaving financially stretched or thinly managed players vulnerable if the market comes off.

This has been a persistent area of commentary since April, when listed player Brierty Ltd issued surprise profit warnings.

With that in mind, Mount Gibson Iron Ltd's announcement late last week that it had received requests from a number of its customers to delay the shipments of hematite iron ore during the second quarter of the 2009 financial year has raised eyebrows, with concerns that it could be the start of a slow-down in demand from China with flow-on effects for the whole sector.

Business adviser and former academic Tim Atterton said two mining services companies he was involved with had experienced drops in income between 10-20 per cent in September.

Mr Atterton said the businesses had decided to defer capital expenditure until it was clear whether a longer-term trend was unfolding.

"We don't know if September was a blip or the start of a downturn," he said.

WHK Horwath insolvency expert Mervyn Kitay said inquiries were up, as was the level of consulting work he already had, a sign that real collapses were imminent.

"We still see the WA economy as quite strong but through our earlier experience in booms and busts there is a lead time, which is say six to 12 months," Mr Kitay said.

This view is underlined by the type of crisis that has unfolded; the crash might have had an immediate effect on banks but the credit squeeze will ultimately hit those seeking funds that were previously easy to tap.

"Liquidity is more of a concern than the actual business environment," Mr Kitay said.

Of course, this has been acknowledged by governments the world over, including Australia's, which moved to guarantee deposits and offshore credit given to Australian banks.

Hartleys investment adviser Chris Munro said it was the second element of this that had helped kick the market back to life last Monday, as investors saw the strategic importance that government had placed on keeping liquidity in the system.

"Interbank lending is probably more important than the deposit guarantees," he said.

BDO Kendalls director David Stevens said he was on leave late last week, in the south of the state, and took several calls from worried clients about the security of their deposits in various institutions, from minnows to the mighty.

He said he was surprised at the level of concern by clients that were, in some cases, very sophisticated.

"It was like the late '80s and early '90s when there was concern about Challenge Bank," Mr Stevens said.

"It is interesting the negativity of people, it's the uncertainty.

"It was very good timing by the prime minister to make that decision over the weekend."

With the global banking crisis playing out at a macro level, corporate advisers believe there may well be time for businesses to get their affairs in order, ahead of what is predicted to be a protracted slowdown.

"The biggest issue I have been trying to bring back to clients is to watch your debtors," Mr Stevens said.

"Keep people on a tighter leash than you would normally have.

"If you are unable to keep them on a tighter leash then do less business with them."

He also said managing creditors was also important. Paying late might save dollars but suppliers might choose to stop doing business with such clients.

Mr Stevens added that it was not all doom and gloom in the marketplace, and while corporate activity had dried up, there were still buyers.

"There are still people and business around with cash," he said.

"People are on the prowl."

Perth's property sector is one area where NAB WA general manager Andrew Whitechurch reckons the experienced campaigners have been sizing up the situation for some time.

"They have seen this coming and put the cheque book away 12 months ago," Mr Whitechurch said. "It was getting too expensive and they also knew it was coming and there would be value in 12-18 months' time.

"They are well positioned."

Mr Whitechurch added that, while some of the regional players had stopped taking new business customers, the bigger banks had not gone that far, and were simply increasing the necessary due diligence on all transactions.

Deloitte corporate reorganisation group partner Gary Doran is another who believes businesses have time to get their affairs in order to limit their exposure and take advantage of the situation that's likely to unfold.

Mr Doran said he attended a major international insolvency conference in Beijing last month, hearing many of the concerns about Europe that had not been previously evident to observers in Australia and actually seeing the impact of the crisis for US participants.

"Lehman Brothers folded [during the conference] and 25 per cent of them [delegates] left to go and do the work," he said.

Mr Doran said companies that had been on a high growth trajectory had to start "sweating their assets" and managing margins, especially those that faced refinancing in the next six months.

"There will be a lot of opportunities to come of this," he said.