Soldiers of misfortune: FDs ready to take on recession

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Last summer we ran our first litmus test of finance directors' feelings about the credit crunch, where the UK economy was headed and what it meant for them. At that time, FDs told us they were readying themselves for a prolonged downturn, planning to reduce headcount and scale back discretionary spends such as investment in IT systems or travel and entertainment budgets.

Well over half told us the credit crunch hadn’t forced any changes to existing strategies and plans and about the same number thought the crunch was an opportunity to actively seek discounted acquisition targets in 2009 ­ though many thought financing and financing terms could end up being prohibitive given that credit markets were drying up fast.

None of us could have anticipated just how dry the credit river was about to run. In the 20 weeks that followed the survey, we witnessed one worst-case scenario after another, from the Lehmans collapse, the total seizure of credit markets on both sides of the Atlantic ­ over here, leading to Chancellor Alistair Darling's £50bn bank bailout, an emergency VAT cut and a mass march of high street brands into administration, led by pick 'n' mix icon, Woolworths. All of this strangled the last vestiges of hope that we weren't heading for recession. For good measure, we closed 2008 with the bailout of Detroit's auto industry at great cost to the US taxpayer and, here, opened 2009 with the final death throes of banking titan RBS as an independent entity.

Here we go again
Last month, to see if sentiment had followed the economy south, we put many of the same questions we asked last summer to our readers, adding a few new nuggets (and changing the term 'credit crunch' ­ now hideously kitsch in our opinion ­ to 'recession'). What we found was one of the only groups in the corporate world not reporting wide-scale and devastating change to their jobs, situations and outlook. FDs remain surprisingly upbeat about their chances of survival, about riding out what most think is going be a deep recession and a vast financial regime change, about their financing, the skills of their finance teams and, crucially, their own abilities.

Of our 155-strong FD cross-section, half tell us they are confident in their own skills to face the challenges ahead and a further 43% say they are ‘very confident'. Forty-four percent have high confidence in the skillset of their finance function to help survive recession ­ almost holding steady at just 3% lower than six months ago ­ while those ticking the top ‘very confident' box for that question rose a few percentage points to 39%.

We asked FDs the areas of their business in which it was most likely they would make cuts, choosing their most important area, then a second and third. Surprisingly, only 33% said staffing was their first port of call this year ­ and even more surprising was the fact that this represents just a 6% rise on last year's figures for that option. Those hoping to uphold the status quo dropped away sharply in the period between the two polls, with just 9% of respondents saying they plan to make no cuts at all, compared with 30% last year.

Systems investments, M&A activity and travel and entertainment are a shade more popular as first choices this year, the latter being the most poplar option in the ‘second choice' list and first in the ‘third choice' list.

As the economy contracts sharply, so too are the bonuses board level executives enjoyed throughout the credit boom; this ranked higher as a first choice, with 7% putting this first in a list of cuts this year, compared with 3% in 2007 who chose board-level bonuses as first in line for the chop. Despite heightened awareness of the growing financial and regulatory burden on pension schemes, cutting contributions figured last in FDs’ minds, showing no real change on 2008's figures.

The critical question of funding was illuminating. When we asked if FDs had been forced to refinance their business this year, 13% said yes compared with 9% in 2008, making reassuring reading. Of those who say they had to refinance since last summer, 44% found a new finance provider altogether, making it the top response. We didn't offer this as an option last year.

This time around, with the banking sectors in the UK and the US caving in, FDs report less renegotiation of existing credit arrangements. In 2008, the most popular route to refinancing was to renegotiate existing credit lines to obtain more cash, with 56% of the vote; that compares with 33% that chose this in 2009. In joint third place this time were the options of a new share issue to raise capital, or a business unit spin-off. Refinancing through asset-based finance or lending dropped from second place last year to fourth this year. “Funding, liquidity, funding, liquidity, funding, liquidity", was one FD's quip when asked what is most important now. Unfortunately, their bankers have the same predicament.

Good relationships
Curiously, though, this has put some in a position of strength. FDs tell us their relationship with their bankers and principal finance providers is holding up well. A 43% chunk of respondents say there is no change in the relationship ­ though that's down on the 72% that agreed with this statement in 2008 ­ while about 7% say the relationship has actually improved since last time we asked. Though 29% report that the cost of credit to them increased significantly (relative to Bank rate) in the past six months, only 12% say they have had their credit limits curtailed or even withdrawn in that period and 10% say they've had tougher covenants imposed on their finance agreements in that period.

That said, FDs are vociferous on what they think the government needs to do to help the economy, mostly lambasting Messrs Brown and Darling for the failure to get bank lending going again ­ from the banks they now control, by and large ­ and instead taking what they see as pointless actions such as cutting VAT. “The government needs to bring some sort of confidence back to the economy and forcing the banks to readjust lending criteria on mortgages4 would certainly help our business," says one FD for a building company.

Another believes that Brown and Darling “need to get lending to companies going again ­ if that means giving banks guarantees so that they lend to one another and Libor falls as a result, then great."

The government announced it was going into the insurance business a fortnight after our survey closed, saying it would guarantee banks against the effect of defaults if they started lending again, which, interestingly, answered one of the solutions many FDs wanted to see. But respondents were strong in their condemnation of the government's softly-softly approach to recession. The VAT rate cut, not forcing banks to lend and not being creative in finding ways to help business through various other tax relief options all came up.

“The priority is not lower base rates, which is a bit like pushing on a piece of string, but to get the banking system lending again," one FD says. “I have no faith that the government has understood this, let alone that it has any clue how to do it." Another says, “Rather than reducing VAT, the government should have injected cash into pockets via personal allowances."

FDs suggest to us everything from using tax breaks to reduce insolvency risk and stimulate investment in employment and business, to reducing corporation tax, cutting National Insurance contributions and even compliance burdens. But a good number simply say they think the government should “stop tinkering" with the economy and let nature take its course. This chimes with what they told us last year ­ that a recession is badly needed as a ‘reality check' on fuelling the last decade of growth on the back of credit.

What’s needed
What is now most crucial to FDs? Not just getting cash in the door (though some FDs tell us their top concern is “keeping their job” and “getting paid” ­ not many respondents let on to us that they are in such dire straits).

Many FDs now feel under pressure to find ways to save money, with headcount reduction being the most popular route, but mindful of the risk. Nobody knows when recovery will kick in and companies won’t want to cull good people, only to have to find more people in a few months’ time who may not be as good. Many FDs say they feel keeping up morale and confidence among staff at all levels of their company is key to them.

One FD says the top priority in 2009 is “keeping confidence of the group in the ability to maintain revenue and resisting the tendency of the group to demand headcount reduction when this would definitely reduce revenue.” “Keeping everyone’s respect” and “remaining positive” listed regularly in FDs’ priorities.

Perhaps 2009 will be the year of the FD. It will certainly be the year getting the numbers right really counted and who better to look to for that reassurance than the finance director? As one FD says: “If we can survive while all around us are losing their heads, as they say, then there should be significant rewards in being the last man standing.”

See the full survey at www.financialdirector.co.uk/surveys