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FDs prepare for the crunch

Jim Pettigrew, finance director, Ashmore Group
“The credit crunch has thrown up a number of issues for finance directors. The
cost of borrowing has obviously increased, but the flip side is that a clever FD
holding a cash balance can get a better yield for the company’s shareholders.

“The credit crunch has had a ripple effect. For example, it is having an impact
on exchange rates, so FDs at international companies have to think carefully
about how they manage their currency risk. The crisis also has an affect on
interest rates so they need to consider whether to switch to fixed rates or
stick to floating. And there are the broader implications for this crisis: will
it lead to an overall slowdown in consumer spending and affect a company’s
underlying business. It is a very interesting time for FDs: they have to think
about the impact this will have on their business and plan accordingly, as well
as take advantage of any of the opportunities this situation presents.”

Jonathan Loynes, chief European economist, Capital Economics

“The credit crunch could have a significant impact on the financial sector.
Those concerns obviously came to the forefront with the news on Northern Rock.
There are worries that there will be job losses and that might drive down London
house prices. In my view, that is not the most serious threat. The major threat
is the impact of the high rates in the interbank market. This has the potential
to affect every household and every company in the country. It could push up the
cost of mortgages and company borrowing; it would be equivalent to the Bank of
England increasing the base rate. But to put all of this into perspective, let’s
remember that the Bank has been deliberately raising interest rates over the
past year. It’s been touching the brakes, partly because of inflation concerns
driven by higher oil prices and partly because it feels that the economy has
been growing a little too rapidly. What’s more, it has signalled that it may
have to raise rates further. It may well be that we’re just seeing the financial
markets doing what the Bank intended to do. If the economy slowed down more than
the Bank intended, then it always has the option to cut rates aggressively to
stimulate growth.”

Hugh Brown, head of corporate finance debt advisory,
“The debt market is still open for business for deals up to £300m to
£400m. There is plenty of money around if you know where to look. Some banks are
closed, but others are using this as an opportunity to gain market share. Some
of the houses that previously only looked at big deals in the £500m to £1bn
range are now looking at deals below £500m. Jumbo deals could still happen, but
they are likely to be in the vein of Rio Tinto buying Alcan rather than Cerebrus
acquiring Chrysler. A solid business that is making a strategic acquisition will
find the debt market still open for business. I don’t believe this current
crisis spells much of a respite for trade buyers which have struggled to match
the prices private equity is prepared to pay. They were struggling when the debt
multiple was four times. The debt multiple private equity can afford to pay has
slipped from eight times to seven times so trade buyers are likely to still find
the market tough.”

Daniel Finestein, managing partner, Infinity Asset

“When banks start ignoring the central banks and start deciding interest rates
among themselves, it must mean that they are worried about what they will have
to pay out in the future. This indicates to me that there is more bad news to
come. As far as the buy-out industry is concerned, we are going to see lending
criteria returning to more normal levels. Banks will no longer be lending
blindly because the name of the private equity or hedge fund was so good that
they wanted to get in for fear of being left behind. Private equity houses, like
us, that price deals at a sensible level and do not use extraordinarily high
levels of debt will still be able to do business.”

Robert Pitcher, partner, Eversheds
“Highly-leveraged private equity or hedge fund-led deals are now very difficult
to execute. Part of the problem is that no-one has a good feel for the scale of
the crisis. I think the credit crunch isn’t catastrophic for the market as a
But the current lack of trust in the market is catastrophic to highly leveraged
M&A deals. Large transactions in excess of £6bn to £8bn have seen a severe
slowdown, but anything up to £1bn to £1.5bn is ongoing. Deals up to £5bn can
still get done if there are very good strategic reasons that would appeal to
trade buyers. Those trade buyers making strategic acquisitions have access to
more traditional sources of bank debt to underpin their equity. If you have a
good business which throws off good cash flow, then you are still able to do the
We are looking at a number of deals at sub £100m, five or six over £100m and
three or four over the £500m mark. In that market it seems to be business as
usual. People need to be cautious, but not panic stricken about the outlook for
rest for the year.”

Teo Lasarte, European credit strategist, Merrill Lynch
“Over the past five years, the synthetic credit market and the
traditional corporate bond market have become increasingly intertwined. The
collapse in the US sub-prime mortgage market has stalled the synthetic market
and European investment grade bonds have suffered collateral damage. This means
there’s been an aggressive sell-off of investment grade bonds over the summer
and new issues have ground to a halt. If, however, you look at the fundamentals
of corporates, rather than financials, they are still looking quite healthy even
if you move down the spectrum to high yield. Our concern in the near-term is
there could be further bad news surrounding banks’ exposure to off-balance sheet
items including CP [commercial paper] conduits and structured investment veh i
cles. If these items have to be brought back onto the books, banks may be forced
to issue more debt to cover these liabilities which could increase supply and
further widen credit spreads.”

John Ewan, director, British Bankers’ Association
“In September, BBA Libor rates climbed to a level above base rate not seen since
the collapse of the hedge fund LTCM [Long-Term Capital Management] in 1998.
Since that peak, there has been some increase in interbank liquidity and rates
have eased as a result. This does not mean that every bank found it could get
access to the market: banks with impeccable credit ratings could borrow, but
others, like Northern Rock,found the market closed. It would be wrong to say
that the banks are only worried about the increased risk of lending to each
other ­ it is uncertainty that is driving this credit crunch. The slicing and
dicing of US sub-prime mortgage risk means that no-one knows who will be holding
the parcel when the music stops. Companies that want to borrow money to fund
their business activities are caught up in this mess because the interbank rates
form the basis for pricing of corporate loans and so they are seeing their
borrowing costs rise sharply and a rapid shrinking in the availability of

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