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The Banking Crisis – a thing of the past or ever present?

Nearly 3 years on from the biggest global banking crisis ever to engulf us, things seem to be looking brighter. Many construction companies and house builders have gone back to work. However, talk to commercial banking customers, and the story is very different.

The biggest banking crisis which unfolded in 2008 hit those working in property development and construction particularly hard. Many customers experienced problems with their banks  when the significant drop in property prices and the banks’ own internal problems resulted in a push within commercial banking to drive down the amount of property based lending almost no matter what the cost and the loss to the customers and the banks. Many customers were forced out of business when previously negotiated arrangements were no longer made available to them. Promises to provide development funding were in many cases withdrawn leaving the developer unable to build out and no longer able to sell the site on.  In other cases, the banks forced the renegotiation of lending, resulted in punitive arrangement fees, crippling high LIBOR interest rates, and much shorter term arrangements.

In 2011, nearly 3 years on from the biggest global banking crisis ever to engulf us, things seem to be looking brighter. Many construction companies and house builders have gone back to work. Mothballed sites have been dusted off.  Some businesses are expanding. Recruitment is picking up. There is a sense of a small but nevertheless clearly identifiable sigh of relief. As one insolvency practitioner put it: “I think it’s fair to say we are beginning to see a recovery, even if that recovery is fairly anaemic at the moment”.

However, talk to commercial banking customers, and the story is very different.  For those that survived the crash and were able to renegotiate, generally that renegotiation involved servicing of the debt at a very much higher cost, and much shorter term arrangements.  Many facilities were renewed on a very short term basis ranging from 3 years to only on a 12 month or 18 month basis. In effect, a stay of execution.  Both the banks and their customers were able to draw breath, albeit at greatly increased cost to the customer.  However, there is increasing evidence that as these renegotiated loans come up for renewal, the banks are taking a hard line. The banks face a huge increase in demand for refinancing over the next 12 months; there is evidence that in 2012 £34 bn of facilities will be up for renegotiation in what accountants have dubbed “the maturity spike”.

You might have been forgiven for thinking that given that the worst of the crash now seems to be behind us, the banks would be more flexible on the terms  and less punitive on arrangement fees  and interest rates. Not so according to many of our clients. Anecdotal evidence suggests that the banks, faced with huge demand for refinancing and continuing board level instruction that property lending must be driven down even further, have decided that many more of their property based customers should be removed from their books.  The evidence shows that many customers are being told they must simply repay their borrowing and take their business elsewhere.

What can you do? Not all banks are working to the same lending criteria and some are prepared to be more flexible both on the type of businesses to whom they will lend and the terms. For customers prepared to plan ahead and shop around, it may be wise  to look at refinancing options now, regardless of when your facilities are due to mature.  Having a range of options does not just make good business sense – it may make you more attractive to your existing lender. As Bob Hope once said: “A bank is a place that will lend you money if you can prove that you don’t need it.”

Of course, in many cases, refinancing is not a viable option. In cases where your bank has you over a barrel and is imposing penal refinancing terms, there are legal arguments you can employ  which can help in negotiating the terms. In our previous blogpost we explained the concept of Economic Duress. It may be that time is coming when more than ever, these arguments are going to be tested.

Cat MacLean is an Associate and Solicitor Advocate in our Litigation Group.  Please contact Cat on 0131 226 8218.

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