Foreward
In August we welcomed Michael Wykes to the team, who joins us to head up our Creditor Services division. Michael will introduce himself and our creditor services offering in our autumn edition.
In this issue, Colin Prescott takes a look at the economic events of the last 12 months and the impact on the insolvency/recovery industries, Greg Palfrey discusses the much needed restructuring of the global motor industry and Toby Holt warns of an increase in European Union (EU) nationals seeking bankruptcy in the UK. We also hear from Graham Robinson in the Cayman Islands on the importance of the local insolvency regime. This edition also features two guest authors, Alison Beech from Spicerhaart discussing the buy-to-let market and Ryan Mulcunry from GA Asset Advisors discussing the new breed of 'bargain-hunter' consumers and their effect on retail businesses. In response to feedback, we are working on developing an electronic version of this newsletter which can be delivered by email. We also recognise that many of you are happy with the print version as it is and we will continue to offer both versions. We'd be grateful if you could read the enclosed letter and let us know how you would like to receive our newsletter going forward once the electronic version becomes available.
THE HALFWAY HOUSE FOR LENDERS
By Alison Beech
At Spicerhaart, we operate one of the UK's most advanced corporate sales divisions, working with lenders to sell properties where owners have defaulted on their payments. A significant number of those in trouble are amateur investors seduced by get-rich-quick schemes, off-plan marketing and TV property programmes persuading them they could make a fast buck. Instead, they have found themselves heavily in debt, with lenders clamouring for their money.
The effects of the crunch
One of the biggest problems for landlords was that mortgage products disappeared almost overnight. BTL investors who had locked in to attractive two-year fixed rates were left without any remortgage options and were having to manage an eye-watering hike in interest rates as they were forced on to the lender's standard variable rate.
BTL lenders began to experience a spike in defaults as landlords who were heavily geared, and had not prudently factored in the impact of rental voids, were unable to meet their mortgage payments. Not all lenders were experienced in BTL portfolios and some adopted the traditional, albeit last resort, approach of repossessing the property and gaining vacant possession to allow them to sell the property quickly on the open market. As time has gone on the initial terror has calmed. It has become increasingly common for lenders to consider carefully their strategy for both BTL loans which are in arrears, and where they have enforced their security and repossessed the property because of borrower default.
The solution
The Law of Property Act (LPA) 1925 allows a lender to appoint an LPA receiver who can collect any rental income and pass it on to the lender. This can equally apply to individual or portfolio loans. It may be a halfway house, but it means a lender can decide the appropriate strategy for the loan. This is done by assessing the potential capital loss incurred by forced sale against the upside of receiving a rental income and disposing of the property when more beneficial market conditions prevail.
Enquiries from lenders for LPA receivership are increasing. This has remained an option for lenders throughout the housing boom, but it is imperative they understand how receivership works and take professional advice. The opportunity remains to mitigate their losses or even recover the capital and accrued arrears in full by holding the asset as an investment.
The halfway house for lenders Different lenders will have different strategies depending on the structure of their balance sheets and the extent of their BTL loan exposure. LPA receiverships are increasingly being considered as a solution and Spicerhaart, in conjunction with Smith & Williamson, has developed a one-stopshop product aimed at BTL portfolios which is generating a lot of interest.
Spicerhaart operates the haart, Spicer McColl, Darlows, Haybrook and Felicity J Lord estate agencies and is the largest independent estate agency group in the UK.
CRISIS? WHAT CRISIS? - BUSINESS OPINION IS FAILING TO MIRROR ECONOMIC EVENTS
By Colin Prescott
It's fair to say that most commentators would suggest that the current global meltdown was initiated by events dating back to 2004, when interest rates in the US rose from 1% in 2004 to 5.35% in 2006. This caused a slowdown in the US housing market as a result of householders defaulting on sub-prime loans.
This in turn impacted adversely on the major US banks and other institutions which were left with bad (toxic) debt after purchasing bundles of sub-prime loans. Between then and now there have been failure and attempted rescue stories reported on almost a daily basis. A multitude of financial giants have been in the news since the spring of 2007 including Lehman Brothers, AIG and Northern Rock.
So how has this affected the UK economy and where has it left the insolvency, corporate recovery and turnaround professions? 'In a state of flux' is probably the best answer. Nobody seems to know whether the worst is over or whether business in general is yet to feel the full force of the economic downturn.
While the headlines have been grabbed by high-profile high street names such as Northern Rock, Woolworths, MFI and LDV it should be noted that there are more than four million small and mediumsized enterprises (SME) in the UK which employ some 13.5m employees, or about 59% of the private sector workforce. Notwithstanding the record number of bankruptcies and company failures, the influx of insolvency work can only be described as sporadic. The Midlands for example, due to the pre-dominance of manufacturing in that area, has perhaps seen higher levels of failure and the knockon effects of failure than in other parts of the UK.
One feature of the current climate seems to be the lack of available cash. Whether this is due to caution on the part of the banks remains to be seen, but with property prices having fallen since their peak in late 2007, banks' security cover has diminished and many householders who mortgaged up to 100% when times were good have found themselves with negative equity.
This problem is borne out by chattel asset agents reporting that they are finding it difficult to sell/liquidate assets as few people have cash to part with. Furthermore, while there are record numbers of bankruptcies at present, the large majority are staying in-house with the official receiver as there are no assets available for private sector insolvency practitioners to deal with.
Some commentators are saying that the green shoots of recovery are showing through. I'm not so sure. If they are, we must congratulate the various financial institutions and governments around the world for what should be described as the biggest and fastest turnaround in history. It was, after all, only last August that Alistair Darling warned that the economy was facing its worst crisis for 60 years, adding that the downturn would prove more "profound and long-lasting" than most had feared. It should also be remembered that the US economy was 'officially' declared in recession only as recently as December 2008 – followed closely by the UK economy in late January 2009.
So the more likely scenario is that there is a pause in the economic slowdown represented by a slight increase in like-forlike sales figures, manufacturing output declining by a smaller amount, a pick-up in the housing market activity and the recovery from the lows of the international stock markets in March 2009. But caution must be taken as many of the green shoots comments have been based on surveys that track the expectations of businesses and households and not their actual behaviour. Businesses and consumers are slightly less pessimistic than in previous months but they are far from optimistic.
In the real economy, unemployment is still getting worse, manufacturing output is still in decline (albeit by a smaller amount) and the signs of recovery are still not strong in some of the world's leading economies. Conditions are worsening in developing countries with the exception of China.
A partner in a local accountancy practice recently pointed out that a large number of SMEs have March year ends. For the year ended 31 March 2009, those companies possibly enjoyed eight months of relative normality, the real downturn coming in late 2008. For the year ending 31 March 2010, the same companies will have endured twelve months of hardship and that will be the time to see whether the green shoots have emerged.
Finally, there is also the small matter of the amount of debt that is owed to HM Revenue & Customs (HMRC) (including deferred taxes that were recently introduced to help ease cashflow). How much? A mere £25.8bn, but don't panic as HMRC has confirmed that it does not have enough manpower to make pursuing debts below £10,000 "a priority".
As Supertramp said back in 1975 "Crisis? What Crisis?"
THE CHANGING CONSUMER
By Ryan Mulcunry
The 'r' word seems to be on everyone's lips as the information age brings heightened awareness of the current recession. Consumer spending in the UK, which accounts for a large percentage of the economy, will be instrumental in our financial recovery. When the recession began, consumer confidence had declined, but according to the Nationwide Consumer Confidence Index there has been a recent increase. The index recorded "an increase in June, moving up to 58% from 54% in May. This increase reflects that overall, consumers feel increasingly positive, as confidence levels are now very close to those recorded this time last year (59% in June 2008)."
When the consumer is ready to return to the marketplace again, how will the recent suffering affect his/her behaviour?
A recent article in the Financial Times found that consumers are coping with economic woes by purchasing items that afford them some sense of control in the midst of a financial tailspin. Cadbury, the UK based confectionary group, reported an unexpected increase in its 2008 profit margin. Krista Faron, a senior analyst at Mintel pointed out, "Chocolate may very well be recession-proof – it's just a matter of how much consumers want to pay for it."
Many of the dynamics of UK consumer spending and attitude during a recession can be found in all global markets. Great American liquidated 527 Circuit City stores at a time when they were the second largest electronics retailer in the US. The liquidation provided added value to the consumer via the peripheral products associated with most electronics purchases. For example, while a television may have been on sale at competitor Best Buy Inc., Circuit City offered the television, the stand, the high-definition cable, and the DVD player at a discount. The more prudent recession-battered consumer shopped around and realised what good value Circuit City offered.
Liquidators are being forced to compete more with traditional retailers, who have
used much higher than normal discounts to sell through excess inventory caused by slumping sales.
With retailers taking deeper discounts, the Associated Press reported a shift in consumer behaviour, as shoppers are becoming accustomed to discounts of 70% or more. J. Walker Smith, president of marketing firm Yankelovich Monitor, noted that lower pricing offered by companies holding excess inventory is creating deflationary expectations. According to Smith, "People are sitting around waiting for more discounts. That's a really bad thing. The deflationary cycle is very difficult to remedy once it takes hold."
Yet, retailers may be learning their lesson and paring down inventory to account for slumping sales. As inventory levels are reduced, retailers do not need to offer fire-sale prices to generate cash and reduce the liability inherent with excess inventory. As a result, discounting levels should begin to normalise. While retailers will likely continue to be competitive with promotions, the high discounting offered during the 2008 Christmas season is "not going to happen again in our lifetime," according to the NPD Group Inc.'s chief industry analyst Marshal Cohen.
Consumers have short memories, but are smart. They will look for the best deal available and if that happens to be 30% off, will quickly learn to accept a 30% discount again.
Once the consumer finds the lowest price, economists are left to wonder how they will pay. Will the recession-weary consumer be less likely to rely on plastic, especially after the credit crisis? Credit card lenders are tightening credit limits, raising standards, closing accounts, decreasing rewards, raising interest rates, and increasing fees.
The stringent standards from credit card companies are reducing the temptation of overspending that contributed to consumer debt leading up to this economic crisis. Now, shoppers are also facing less peer pressure to spend. As the president of the National Retail Federation stated, "cheap is chic." Coupon use is on the rise, and the same consumer who previously boasted about how much she paid for a handbag is now bragging about how little she paid.
GA Asset Advisors is a subsidiary of Great American Group, which has been successfully managing assets in essentially every business environment. For more than 35 years, Great American Group has partnered with businesses across the globe in effectively appraising and divesting assets with one main objective: to maximise value.
BANKRUPTCY VACATION
By Toby Holt
German and Austrian websites are now offering debtors advice on becoming bankrupt in England, as the one-year term of a bankruptcy is seen as a soft option. Also, an attachment which would normally last for three years in the UK can in some other European jurisdictions last for the same period as a bankruptcy in that country – up to six years. The official receiver has confirmed that it has recently seen a large increase in the number of debtors petitions for European Union (EU) nationals.
In a recent case where Smith & Williamson was appointed as trustee, it became apparent that an Austrian national had made himself bankrupt in England, as he thought he could use the bankruptcy regime here to avoid an attachment order on his pension. Leanne Schneider-Rose of Sydney Mitchell, the trustee's lawyer commented; "the bankrupt had clearly done his research as to what he could and could not do. He had many debts and one very large attachment order against his pension which paid over €2,000 per month to a bank to which he owed money. He knew that if he made himself bankrupt then this would stop as that debt would fall into the 'pot of creditors'. However, what he had misjudged was that we (the trustee) would be able to attach his pension.
He was of the view that his pension was safe. What he did not realise was that when the pension becomes income then it can become the subject of an income payments order."
Debtors merely have to demonstrate to the court in England that their centre of main interest is in the UK in order to ask for a bankruptcy order to be made. Residency doesn't automatically equate to the centre of main interest and so a number of individuals have successfully sought to use this loophole to exploit the 'softer regime' found in the UK.
What's the answer? An EU-wide reform of insolvency legislation to bring each country into line? This is highly unlikely to happen anytime soon, and so while the current legislation exists, creditors will have to rely on the expertise of experienced insolvency practitioners and lawyers to uncover the actions of wily debtors seeking to manipulate the legislation to their advantage.
MOTORING THROUGH - RESTRUCTURING OF THE MOTOR INDUSTRY AT HOME AND ABROAD
By Greg Palfrey
The landscape of the global motor industry has shifted dramatically in recent years, with demand for new cars plummeting causing a damaging slump in sales. Manufacturers in the US are facing a rude awakening, General Motors (GM) and Chrysler have already been forced to seek a considerable bail out from the US Government (for GM alone US state support has reached some $50bn). Both businesses have struggled with falling sales, as demand for their core product – larger vehicles with high fuel consumption – has plummeted. Rising fuel prices and the lack of available credit has made these models an unattractive choice for the consumer.
GM has recently emerged from Chapter 11 proceedings as a smaller, leaner and more focussed company, in what has been a tough but necessary restructuring. The Italian car maker Fiat completed the purchase of its stake in Chrysler, and hopes to use its expertise in building smaller cars to meet the needs of the modern consumer.
Outside the US, the motor industry follows a similar trend, with subsidies and loans reaching unprecedented levels, and national champions being kept alive when perhaps they might otherwise have disappeared long ago.
The fundamental problem with the industry is that there are just too many plants making cars. Global demand is some 60m in the good times, but capacity to manufacture is 90m. GM spends more each year on health care than on steel and with the market for SUVs having collapsed, things had to change.
UK perspective
In the UK, the motor industry has suffered heavily as a result of the recession and plant closures. While second-hand car sales have increased and margins are improving, new car sales are still well down on previous years. The UK Government's scrappage scheme, hailed as a success by many, has boosted sales but its popularity has meant funding is likely to run out before the deadline. But the market may well pick up as second-hand car values increase and supply is reduced.
In recent months alone Smith & Williamson has acted as administrators to two organisations in the industry: a three-site Vauxhall dealership, Bicknell's Ltd, which was one of the largest parts businesses in the UK turning over £40m per year, and Gowrings (Mobility) Ltd, a £19.5m turnover company based in Newbury which converts some 1,400 vehicles for wheelchair passenger use annually.
A very successful 'going concern' sale of the Gowrings' business was achieved after trading the business in administration for a month. The cooperation of Gowrings' three main base vehicle suppliers and its principal customer, Motability Finance Limited, had to be secured to achieve this. In the case of Bicknell's, whose franchise had terminated, its two main sites were sold after a managed closure and these are trading again as Vauxhall dealerships. It seems there are buyers out there with money and an appetite to acquire businesses.
Looking ahead
The transformation of the industry will be fascinating, with the US producing smaller cars and, in India, even smaller ones such as the Nano. The International Monetary Fund forecasts that there will be 3bn cars in the world by 2050, compared to 700m today. In the next 40 years it estimates that the Chinese will have as many cars as are currently in the world and in the next 5 to 6 years will overtake the US in terms of car sales.
The motor industry is going through a tough restructuring, but for those that survive the outlook is good provided you are in the right market place with the right products.
WELCOME TO THE CAYMAN ISLANDS - WE LOOK AT THE REALITY THAT LIES BEHIND THE ISLANDS' RACY IMAGE
By Graham Robinson
If you have ever read the John Grisham novel The Firm, you may think that the Cayman Islands is a haven of secrecy and tax evasion. However, the facts are somewhat different.
The pre-eminent offshore jurisdiction, the Cayman Islands (the Islands), is the fifth largest financial centre in the world, and as such has developed a progressive, professional, client-friendly business environment that is responsive to the need of the financial industry. Effective regulation and monitoring has ensured that the Islands remain a safe financial centre with a secure reputation.
However, as businesses worldwide are struggling to contend with the recession, the offshore world has had to deal with a number of other issues: fallout from the sub-prime credit crisis, the Bernard Madoff affair and recent events in the banking and finance sector have all had a severe impact on the hedge fund industry. Since 2008 the Islands' financial services industry has come under intense scrutiny by foreign governments. As a result, the offshore business environment is undergoing significant and permanent change.
The Islands is not a secrecy jurisdiction, or a haven for tax evaders and money launderers. It is a fully transparent, sophisticated, well-regulated jurisdiction enjoying high professional and legal standards while delivering tax-neutral products that are vital to the world's economic survival and recovery.
The Proceeds of Criminal Conduct Law (1996) introduced 'all crimes' anti-money laundering legislation and the Islands also have a Tax Information Exchange Agreement (TIEA)(2001) with the US and EU respectively, providing full transparency and preventing tax evasion. It has also recently signed its 12th TIEA and achieved the Organisation of Economic Cooperation and Development (OECD) 'white list' status.
Also, since 2002, extensive work has been undertaken to reform the insolvency rules for the Islands. The Companies (Amendment) Law 2007, Companies Winding-up Rules 2008 and the Insolvency Practitioners' Regulation 2008 came into effect from 1 March 2009. This new regime provides the Islands with a comprehensive, flexible, selfcontained, creditor-friendly regime which not only facilitates the orderly winding up of Cayman-based funds (solvent or insolvent) but can play a significant part in the restructuring of cross-jurisdictional businesses.
The Islands' courts are well versed in granting and encouraging the use of cross-border protocols. The introduction of specific provisions, akin to Chapter 15 of the US Bankruptcy Code, aimed at promoting cooperation in application of the model law promulgated by the United Nations Commission on international trade law have added to the already considerable experience in handling complex, cross-border insolvencies.
The Islands' insolvency regime is one that recognises the rights and needs of both creditors and investors. The cornerstones of the regime are transparency and creditor/investor friendliness.
The work of the liquidator and the Grand Court is open, and active participation of creditors and investors is encouraged. The rules and practice require and encourage transparency.
As we are now all fully aware, a wellregulated financial market is undoubtedly vital to the global economy. The Islands has continually outperformed its onshore counterparts in complying with international standards of regulation.
A reputation for integrity is one of the most important assets an offshore centre can have. The Islands' insolvency regime helps to maintain this integrity even during these turbulent and litigious times by protecting all stakeholders and granting many powers to liquidators, from assisting in the restructuring of businesses to instigating legal actions to recover assets.
The security and stability of the Cayman Islands has been enhanced by recent developments which can only be good news for the worldwide economic recovery.
Graham Robinson is a director of the joint venture between Rawlinson & Hunter and Smith & Williamson, RHSW. He is a specialist in corporate advisory, restructuring and insolvency advice for companies and funds registered in the Cayman Islands.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.