There is no doubt the property sector has been hit very hard by the recession over the past 3 years. However, there may be further trouble ahead: looming on the horizon for many in business, especially property related businesses, is the £163 billion of debt that needs to be renewed in the next three years. Combined with the increased requirement for banks to carry greater capital adequacy, this is going to put the squeeze on many businesses, especially those in the property sector.
All of the major UK banks have large bundles of short term loans made at the top of the market, and they face a huge increase in demand for refinancing over the next 12 months, in what some have dubbed "the maturity spike". The 2012 refinance spike will place significant pressure on Banks’ lending and it is likely that the Banks will be unwilling or unable to renew facilities on even close to historic terms in view of their own costs of capital which have increased since the facilities were first granted. This situation is only exacerbated by the fact there is no competitive Bank refinance market at present as the vast majority of major Banks have the same property related issues.
And it gets worse. In addition to the problems presented by the refinance spike, another major issue looms which will hit property businesses and property lending particularly hard. Regulatory pressure is forcing the major banks to reduce their property related exposure which historically has represented a disproportionate element of their loan portfolios. Against this backdrop, Lloyds disposed of £4 billion property related lending last year and is expected to shift a similar amount this year, whilst RBS plans to shrink its exposure to property loans significantly in the next two years including off-loading £1.6 billion of property-backed debt.
Some of that property lending will most likely be disposed of by simply not extending facilities due for renewal. However, many property loans are arranged on longer term finance and increasingly banks are calling property borrowers in default, very often on their loan to value covenants. Increasingly banks seeking to ditch lending they no longer want on their books are placing the customer in an impossible position, forcing penal refinancing terms and giving them in real terms no practical alternative.
Meantime many other banking customers have been forced to sign up to financial products known as “swaps” which were supposed to protect the customer against possible interest rate rises on their borrowing. In most cases the banks signally failed to explain the content of what the client was signing up – often case in blatant breach of the FSA regulations which govern the selling of these types of banking products. When interest rates plummeted in 2008, far from enjoying the benefit of much lower interest rates, these customers ended up having to pay substantially higher interest rates and penalty charges under the swap – a risk which the banks had invariably never explained could materialise. Moreover such customers were tied in to these agreements, often for many years, and face breakage charges of up to half a million pounds if they wished to repay early or re-bank.
What are the options open to bank customers in this situation? Many customers have undoubtedly been treated very badly by their banks but the key to a successful action against the banks is to identify a legal rather than a moral wrong. But having a clear legal argument available is in itself simply not enough. Where such a legal wrong can be identified, wronged customers face an even greater battle – indeed a battle of David v Goliath proportions. The banks have bottomless pockets and all too often are able to use their greater financial firepower to wear a litigant down – and out. What is needed is access to funding to provide the ammunition that clients, who have a legitimate claim against the banks, need to bring the banks to book.
We are therefore delighted to announce the creation of Restitution – a fund which has been set up to assist the growing numbers of aggrieved business owners who wish to take legal action against banks and other lending institutions. Although the fund is not captive to MBM Commercial, it has been created and put together by MBM and initially it is intended that each application will be submitted by MBM, given the substantial number of claimants we have who are keen to be considered for funding. The decision on whether or not to take on a case will be dependent on the estimated costing and, of course, the balance of probability of a successful outcome either in or out of court. This is an exciting and innovative commercial project which also offers hope to business owners who believe they have been badly let down by their commercial lenders.
It will be within the remit of Restitution to consider assisting any type of company with a complaint against its bank but most submissions are expected to come from the property and hotel and leisure sectors, which until the credit crunch of 2008 were the most heavily geared in terms of bank lending. Although operating in Scotland and appealing mainly to a Scottish client base, Restitution may also fund litigation which would take place in the English civil courts.
Many business owners with a good legal, as well as moral, case against banks have been deterred from taking action, partly by cost concerns – the banks have huge pockets - but also by the sheer size of these institutions and the apprehension they naturally feel about taking one of them on in court. This situation is compounded by the fact that ‘class actions’ (i.e. cases of a similar nature) cannot be taken jointly against a single defender in Scotland, as is permitted in England. With the financial cushion that Restitution may be in a position to provide, perhaps a law suit against a major bank may seem less daunting.
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