January News Update 2010

The UK's hallowed Aaa credit rating may be under threat if the government does not find a way to reduce the fiscal deficit faster than it has projected, ratings agency Moody's said. While the current rating outlook is stable (did you know that the UK has never missed a debt payment since the National Debt was created in 1693?), Moody's said that avoiding a potential downgrade now relies on the government being "willing and able to make the required structural adjustment" to taxation revenues - and on the hope that its underlying economic model is not "permanently dented" by the recession.

BUSINESS
Borders, the UK’s second-largest bookseller, went into administration in December and said it would make 36 head office staff redundant, though it is unclear whether finance director Mark Little is among those let go. At the time of going to press, administrator MCR was pursuing “parallel administration strategies” – continuing to seek a buyer for all or some of the company’s stores, while conducting closing-down sales – and said it would have to close down the chain before Christmas if no buyer was found.

Vodafone is the latest FTSE-100 company to announce the closure of its final salary pension scheme. The scheme is currently valued at around £755m and the closure will affect approximately 4,000 workers. According to the company, the move will allow it to improve its defined contribution offering, saying, “This will result in pension benefits that are fair to all employees, sustainable in the long term and affordable for employees and the company.”

EasyJet has parted ways with its finance director. Andy Harrison was reported to have fallen out with the airline’s founder, Stelios Haji-Iannou, who still controls 38% of EasyJet shares. Wyn Ellis, an analyst at Numis, said, “The Harrison departure is a surprise. Sceptics will assume [it] is related to the boardroom spat over strategy.” According to the company Harrison left to “seek new challenges”.

One of the largest investors in National Express, Spain’s Cosmen family, has confirmed it did take part in the company’s rights issue despite campaigning against it for two months. The family spent £74m on maintaining its stake in the company amid the rights issue, despite being one of the board’s fiercest critics.

Shareholders in Punch Taverns rejected the company’s remuneration report for the second year in a row. Fifty-five percent of shareholders refused to sign the scheme off and the main bone of contention was a section of the report that outlines the company’s long-term incentive plans. Under the scheme, board members are eligible for up to 200% of salary, a pension contribution increase, an 11% bonus award and compensation to those departing.

KPMG’s UK business reported a drop in revenues of 1.6% in 2009. The accountancy firm made £1.63bn for the year to 30 September while profits fell from £387m to £382m. Its UK audit revenues rose 4.7% – but the drop in corporate finance work hit its UK and European tax revenues, falling 12% and 5.4% respectively.

REGULATION

The committee overseeing the International Accounting Standards Committee Foundation (IASC) appointed two new trustees to replace French representative Bertrand Collomb and US representative Philip Laskawy, who retire. The new trustees are Yves-Thibault de Silguy, chairman of UK construction group Vinci and a former member of the European Commission responsible for economic, monetary and financial affairs in France, and Harvey Goldschmid, Dwight Professor of Law at Columbia University and a former SEC commissioner.

Troubled Icelandic bank Kaupthing is to be investigated by the Serious Fraud Office (SFO) over “suspected fraud offences committed within the UK jurisdiction” prior to the bank’s collapse in October 2008. The focus of the investigation appears to be decisions in the run-up to its demise that “appear to have allowed substantial value to be extracted from the bank in the weeks prior to its collapse.”

The Financial Services Authority’s (FSA) plans to improve the retail investment adviser market has been met with approval by at least one finance provider. Scottish Life said it welcomed the FSA’s initial findings, which include bringing the regulation of Group Personal Pensions (GPPs) under the scope of the Retail Distribution Review, as well as the removal of commission on advice in the stakeholder pension market.

The Serious Fraud Office (SFO) launched an investigation in December into Aero Inventory following the company’s collapse two months previously. Chief executive Rupert Lewin and FD Hugh Bevan were removed from their roles after Aero’s shares, listed on the Alternative Investment Market, were suspended on announcing a delay in publishing its final accounts.

Credit Suisse will pay fines of $536m for having made payments to persons or countries under US sanctions. It reached a settlement in December with the New York County District Attorney’s Office, the United States Department of Justice, the Board of Governors of the Federal Reserve System, the Federal Reserve Bank of New York and the Office of Foreign Assets Control.

ECONOMIC RECOVERY

Ireland introduced what has been called a ‘slash-and-burn’ budget aimed at tackling its fiscal deficit, unveiled in December. Public spending is to be cut back drastically in order to trim the growing deficit. The initial cuts are aimed at reducing spending by e4bn. Cuts include salary reductions of 5% for public sector staff earning more than e30,000 while e1bn is to be cut from government capital spending plans.

Research has revealed that UK plcs could be sitting on more than £100bn of excess working capital. A survey by Booz & Company revealed that among 202 UK plcs there was as much as £110bn in working capital on their balance sheets. “When capital is scarce, making better use of working capital is not merely a matter of improved practice,” said John Potter, a partner at Booz & Company in London. “Companies risk their competitiveness, in fact their own survival, by neglecting the cash available at home.” The analysis looked at receivables, payables and inventory across 31 industry sectors.

Abu Dhabi announced it will pump $10bn into its troubled neighbour, Dubai, in the form of a sukuk, or Islamic bond – a reversal of its previous position of not offering assistance after Dubai’s principal investment company Dubai World said it needed a debt moratorium. Abu Dhabi said $4.1bn would fund sukuk obligations and the remainder would keep Dubai World going while it was restructured.

The churn rate of FTSE-100 FDs is on the rise, according to a new survey from Reward Technology Forum. The survey showed that those that stayed in the FD job for the duration of the 2008-09 financial year fell by 16%, with 79% staying put for the year, down from 94% the previous year. “These are turbulent times for the FTSE-100 and good finance directors. The ones with mobile skills across industries are in demand,” said Peter Newhouse, who helped compile the stats.

Northern Rock will be split into two businesses at the start of 2010. HM Treasury announced it will restructure the building society so that its mortgage book is managed separately from its other retail businesses. “Now we can prepare the bank for its restructuring and ensure it plays its full role in supporting the recovery of the economy,” said financial services secretary Paul Myners.

Citigroup’s decision to remove the final links to the US government’s bailout package caused the company’s shares to drop sharply. The banking group said it would pay back the outstanding $20bn it owed the government under the terms of the Troubled Assets Relief Program. Altogether, Citi received $45bn under the assistance plan.

The European Commission’s (EC) approval of the proposed restructuring of Royal Bank of Scotland (RBS) has been welcomed by the Treasury. The EC agreed to allow a series of divestments at RBS, meaning there could be three new banks operating on the high street after the restructuring of Lloyds and Northern Rock.