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May 5, 2009

Don’t get carried away by green shoots: Big Media’s debt pile will take years to unwind

By Peter Kirwan MM blog

So the government props up the banks with hundreds of billions of pounds of taxpayers’ cash. We’re told that these massive transfusions of state aid are not designed to save the banks per se. They are designed to save the economy from the banks.

But systemic market failure doesn’t disappear overnight. It remains in the system, mutating into new forms of recessionary pain.

During the past six months, Britain has suffered a major retrenchment in banking capacity. Some international banks have gone bust, others are cutting their losses in the UK. Quite frequently, where two banks used to exist, only one is now left standing. In the case of Lloyds and HBOS, the goverment has helpfully set aside competition law.

The net result? Whether you need to refinance corporate debt or a residential mortgage, there are fewer banks competing for your business. Less competition means higher fees and higher interest rates.

At the Sunday Times, John Waples spells out what’s happening:

The stories from company bosses, both big and small, about the new charges that banks are introducing for even the simplest transaction are horrifying. A covenant renegotiation that a few years back would have cost £250,000 is now £2m. A loan refinancing for a mid-sized company can set you back the cost of a secondhand Boeing 737 (£12m).

In the case of heavy-indebted companies starting to pile up losses, these increased fees and rates mean deeper and wider cost cuts. Often enough, this is the only way to pay the bill. Employees will pay for those multi-million fees — with their livelihoods.

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It’s not as if there’s much of an alternative. If you’re running a company and don’t like the look of these extortionate charges, tough.

Waples writes of an ‘FTSE-100 retailer’whose bank has given notice that it is ready to pull the plug in 2011. ‘The reason: it can find better business elsewhere.”

Elsewhere, the Guardian chimes in with news of the impending return of the debt vultures. These are funds that specialise in buying up corporate debt at a discount to face value.

After buying up corporate debt, the vultures then manoeuvre — often aggressively — to realise a profit on their investment. The problem with this manoeuvring is that it usually takes no account whatsoever of what’s best for the company, its employees (or often) its shareholders.

Result? At the extreme, potentially healthy companies can be forced into administration. More typically, incumbent managers bend over backwards to prove their credentials to the vultures. This means more job losses, inflicted more rapidly.

According to the Guardian, investors poured $3.7bn into vulture funds during 2008. That’s a significant increase on 2007 ($2.1bn) and 2006 ($700m).

The banks are already fleecing hard-pressed customers, and the vulture funds are circling. Against a background like this, it makes sense to regard talk of green shoots with a healthy dose of scepticism.

It will take years to unwind Big Media’s debt pile. Along the way, there will be drama aplenty. 

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