I remember the thrill of returning to the fray as a finance director, and for the first time with a listed company, after seven years as an audit partner for one of the Big Four. I took up my post at Development Securities six weeks after the collapse of Lehmans. It felt a bit like a captain rejoining his troops at the front line, just at the beginning of the Battle of Passchendaele.
I’m a property development company finance director, but despite the pain our industry has been enduring, I can say that I enjoyed 2009. Times of market crisis are fantastic for learning – when experience, personality and creativity must come to the fore for FDs.
Last year was all about focusing on risk management in a very risky industry. Within the finance team, we had another look at our key performance indicators and introduced one or two new measures around monitoring and stress-testing our covenant compliance, both actual and prospective, then decided to review cash and prospective covenant compliance every week at a minimum.
We combed our debt facilities to find constraints and covenants that might easily have been accepted or even overlooked in the heady days of the bull market. We were all too aware that, on the other side, our banks’ lawyers were doing exactly the same, desperately seeking ways to reclaim cash and rebuild their own balance sheets.
Personally, I forced myself into the habit of a rigorous Monday morning reappraisal of priorities. The comfort of routine can be a dangerous thing, especially in unusual times – and these have been… well, unusually unusual times. I kept the lines of communication open across my financial team and the senior team, having found that talking is the only way to make sense of a confusing market. It was important for me and my financial controller to keep close to every nuance – every delayed receipt, every unusual bank enquiry.
Moreover, it was vital that the finance team understood the wider context of what was happening, vital both for their alertness to the situation and for their morale. We talk to our funders, our advisers and as many people in the market as we can as regularly as we can and we have maintained a very open dialogue with our banks. In such a period of uncertainty (for our market, as well as for the banks and the economy overall), we naturally prioritised those conversations, as did many FDs.
Early on in 2009, our thoughts quickly turned to how we might exploit the circumstances. We knew that we had sufficient cash to settle the inevitable Loan-to-Value prepayments (LTV being, for each asset, the maximum ratio of outstanding debt to open market value of the relevant property – for those not familiar), but we didn’t have enough after that to take advantage of any market opportunities the crisis would generate. Following some very positive conversations with shareholders during our year-end presentations, we undertook capital raising in early summer. We were rewarded with a take-up that put us in a strong enough position to start searching out sensibly priced deals – but that is difficult in a market where there is a lot of equity seeking assets.
From a treasury perspective, we were also confronted, after the capital rising, with an unusual conundrum: the challenge of depositing significant sums of cash without an unacceptable concentration of risk. How do you assess your bank’s creditworthiness these days? We have so far adopted a very conservative strategy, spreading the cash around the UK-based majors. There are better rates on offer from the Irish banks, but it is tough to assess the possible additional liquidity risk.
So what of 2010? I cannot remember a time when the bell curve of likely outcomes for the economy was so flat and so wide. We are generally advised that inflation is highly unlikely in the UK, owing to the output gap, but it would be foolish to omit this possibility – or, I think, any other possibility – from our planning. We are keen to lock in some long-term funding at the current low rates, though timing the implementation of a facility is difficult when we do not need the funds today.
There is certainty of fiscal pain ahead and more damaging uncertainty with regard to what the general election will bring, so I think there is a real risk that a squeezed consumer will put a further drag on recovery, the news for us being that this would cause further negative rental growth and business failures.
For myself, I’ve no doubt I’m in for another year of learning. Lucky I decided to come back to a business role when I did, and lucky that I enjoy the experience.
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