Hello again. Sorry that there was no posting last week, we have had an action levied against us by our former employers, Tabak, and I pondered all week whether I blog on that or not. We have a blog ready to go but we haven’t posted it because we want to try and work things out in a friendly manner. For the over 50 people who have responded in support to our email Paul and I thank you.
I have read with interest Bernard Hickey’s blog posted on The Herald website this week following up on Mr Bollard’s criticism of the banks failure to lend to business.
He said they should not underestimate the corporate anger at the way the banks had in some cases summarily reduced overdrafts, changed covenants and have reduced lending rates only slightly.
This reflects exactly what we are seeing in the market as well. I have made regular comment on this. We have one particular case where a purchaser’s business’ financiers have instructed him to reduce his stock holding and his OD which means he doesn’t have enough stock to meet demand and he doesn’t have access to the funds to replace the stock. Not good!
His article makes the comment that banks need to lend to businesses during tough times to preserve jobs, because businesses employ people and households don’t.
The telling comment for the business sales market though is that banks feel they have no choice but to lend to the property market rather than businesses because the risk in property lending tied to a wage or salary owner’s income is lower than lending to a limited liability company with volatile cash flow and minimal assets for security. This is an interesting concept, they would rather lend to the employees than to the employer whose wages or salaries they are paying.
I also agree with his parting comment that business bankers need to learn how to better price risk in business. Just saying no because you don’t understand or can’t quantify the risk gets business nowhere. They have the property market down pat but if wage and salary earners continue to lose their jobs what will happen with the property market?
So where are the banks at currently? ANZ as seen on Stuff are going through a complete rebranding exercise due to be released in October of this year. Why would they do this you ask? Their troubles of the last 18 months mean they have to ‘advertise their way out of a reputational abyss’. The ANZ/National used to be the most business friendly financial institution in the business sales arena. Their Corporate/Commercial staff are in this market nowhere to be seen. You have to ask yourself how feasible it is to run 2 brands in the NZ market. That is a big footprint.
The BNZ has lost their case with the IRD and $654 million dollars in the process. Our dealings with the BNZ remain excellent though and they still seem the most likely of the banks to complete a transaction that we might introduce to them. The rest of the banks will be scrambling to do a deal with IRD you would expect with the ANZ with $562 million, CBA (Owners of ASB) with $280 million and Westpac with $903 million all in dispute. Two credit ratings agencies have said that these tax payments would be unlikely to pressure the NZ banks credit ratings. One of them was Standard & Poors, weren’t they the ratings agency that rated the US Subprime packages in the States as AAA which started the meltdown?
What does this mean for business owners and potential business purchasers? Well it can’t be helping the situation I would think. The banks would have had these possible payments on their balance sheets as contingent liabilities but the BNZ losing their case means they are most likely now not contingent, but actual liabilities. Subject to appeals no doubt! But will the credit departments of each of the banks be told to turn off the tap a little more because the cupboard is now a little emptier? I would hope not but who’s to say.
That really only leaves the Westpac and ASB that need mentioning. Our dealings with the Westpac have been business as usual. They are obviously more cautious in this market and compliance will certainly take longer, but they seem to have come through the meltdown relatively unscathed and our dealings, especially with the franchise division, have been excellent.
We have had very little to do with the ASB because it has always seemed that their focus has been more toward the property market. They have tried to be more active in our end of the market in the last year or so but their timing couldn’t be worse coinciding with the crash in the market. So consequently not much has been done.
The banks still have to lend money to make money, but if they feel the point of least resistance is the property market and the agricultural sector we could be heading for the same bubble that caused this meltdown in the first place?
After all of the doom and gloom though there are plenty of buyers in the market. We released a service industry business with very little tangible assets about 2 weeks ago, multiple was just over 3 times, within 10 days we had 4 offers on paper, 3 at full price and one slightly under and the business is now in due diligence . We have 2 more businesses almost ready to go and we have people ringing us each day to see if they can get the first look, so things aren’t all bad.
They are bad though if you don’t have at least 50% of the purchase price in cash to put towards a deal.