Bailed-out Royal Bank of Scotland controls the fate of many British firms
Article By Simon Bowers The Observer,
HMV, Peacocks and Clinton Cards are just some of the firms that could be owned by taxpayer-controlled RBS, which holds the future of thousands of jobs
Article By Simon Bowers The Observer,
RBS controls the fate of Clinton Cards, Jurys Inn, Thomas Cook and Premier Foods, maker of Hovis.
Royal Bank of Scotland, Britain's taxpayer-controlled bank, will face a flood of tough decisions in 2012 over whether to seize ownership or pull the plug on a host of British employers that are struggling to meet their borrowing commitments.
Among the larger firms whose future could turn on the continued support of RBS are high-street chains HMV, Peacocks and Clinton Cards. Also on the watch list are Premier Foods, maker of Bisto, Angel Delight and Hovis; tour operator Thomas Cook; hotels group Jurys Inn; and Endemol, the Dutch TV production house behind Big Brother and Deal or No Deal.
All these companies, which together employ almost 50,000 people, may yet trade out of trouble, but with a prolonged slowdown forecast, experts at RBS, led by Derek Sach, head of global restructuring, are preparing for a busy time.
Should the hoped-for trading recovery not materialise, any of these firms – all of which have recently sought covenant waivers or concessions from RBS and fellow lenders – could ultimately end up being controlled, or part-owned, by their banks, and in turn by the taxpayer. That might not be ideal, but the alternative would be administration.
Britain's state-controlled bank has already seized large stakes in some of its biggest former debtors. These include the world's largest luggage maker, Samsonite – though RBS's 30% holding was cut to 15% when the business floated in Hong Kong this summer – and the UK's biggest care home operator, Four Seasons Healthcare.
This month alone RBS has added big equity stakes in Italian yacht manufacturer Ferretti and Miller Group, Britain's largest privately owned housebuilder, to its expanding equity portfolio. Some 42 Marriott hotels are also owned by the taxpayer's bank, though they're currently up for sale.
RBS decision-makers are under pressure on two fronts: politicians are accusing the bank of choking off credit, particularly for Britain's small and medium-sized businesses, but many in the City believe RBS's weakness is its reluctance to make unpalatable decisions, especially where a large number of jobs are at stake.
One fund manager, who specialises in buying up property freeholds from failing businesses, gives a damning analysis of the prospects for a number of well- known RBS clients on the high street. For example Peacocks is, he says, slowly being crushed under the weight of spiralling loan liabilities.
RBS and another bank agreed in October to extend loan facilities to 2013 for Clinton Cards, which the fund manager is also pessimistic about, adding that the firm is weighed down by "enormous lease liabilities".
Sach is reluctant to talk about specific clients, particularly listed companies, but defends a strategic approach that tolerates poor-performing clients for as long as is practically possible.
"In the recession of the early 1990s, when I joined RBS, banks were castigated for appointing receivers left right and centre," he says. "When I joined the rate at which we did that reduced. This time round it is very different. The financial sector, particularly in the UK, is making much more enlightened decisions.
"Yes, economies can recover faster if bad loans are cut out quickly, but there is a huge social cost – enormous unemployment and business failures. It is better for all concerned to extend and pretend a little."
The tone of these remarks is likely to trigger scoffing among thousands of small business clients of the bank, many of whom complain bitterly of a lack of understanding from RBS, the biggest lender in this area, with about a quarter of the market.
Last February, RBS and other high street lenders signed up to the government's Project Merlin agreement, which imposed targets for business loans. Despite intense pressure from Westminster, it is perhaps the least likely of them to meet its net lending promises.
Lord Oakeshott, the former Liberal Democrat Treasury spokesman, is among the most outspoken campaigners for RBS to increase lending, resigning in March in protest at what he saw as the weakness of the Merlin targets. "The real criticism is the way they're screwing small companies," he said. "Apart from some walking wounded, big companies in general do not have a problem with finance. It is still the small and medium-sized companies that are the problem – and that's where RBS, the market leader, is squeezing harder and harder and harder."
A close ally of business secretary Vince Cable, he called for the government to "take vigorous action, including sacking and replacing directors", if RBS doesn't execute a lending strategy designed to boost jobs and growth.
For his part, Sach claims that his division has carried out some 500 small-firm debt restructurings this year, saving the livelihoods of about 40,000 workers.
In many cases, he argues, it is easy to see that firms are laid low only by excessive earlier borrowings on their balance sheet. Despite the implicit criticism of his lending colleagues' former imprudence, Sach's preferred solution is, wherever possible, for RBS to demand shares in the company in exchange for writing off debt.
And when it comes to big decisions, particularly in relation to large employers, Sach and his colleagues are in close communication with the business secretary's officials.
When debt-ladenThomas Cook, which takes 6.6 million Britons on holiday each year, lurched into a month-long borrowing crisis in October, negotiations between the company and its 17 lending banks even drew public comment from David Cameron. Asked whether he was concerned for the future of the business the prime minister said he had "obviously" asked Cable to keep him up to date on progress; Thomas Cook was "an important and iconic British brand".
Behind the scenes it is perhaps unsurprising that it was RBS restructuring director Bob Hedger who took the lead in talks on behalf of all the banks, even though the largest exposure lay with HSBC, Barclays and Unicredit.
Seeing that debt uncertainty was damaging Thomas Cook's trading prospects, Hedger pressed for a quick resolution. As a result the banks, and RBS in particular, now look certain to stand behind the troubled tour operator for the foreseeable future – even if that eventually means taking an ownership stake.
In all of its lending decisions RBS has to act in the best interests of all its shareholders, but its senior executives are also aware that their largest investor – the Treasury's UKFI asset-owning unit, with 83% of shares – is equally keen for the bank to act in the interests of the wider economy, sustaining lending support and promoting employment wherever possible.
Sach claims the two goals are rarely at odds. "Our first priority is to protect our own balance sheet but that often means doing what you can to save a business. At the end of the day our job is to save companies ... Creditor recoveries are almost always lower in an insolvency."
Privately, however, even ministers agree there comes a point at a failing business where a bank has to intervene decisively to protect a credit exposure. In October RBS and Lloyds Banking Group called time on Britain's largest nightclub operator, Luminar, after a long period of patient support, forcing directors to appoint administrators from Ernst & Young. Behind the scenes the two banks are thought to have taken differing views on the best outcome for that business, with RBS believed to have favoured a debt restructuring deal that would give the banks ownership.
And last year RBS showed goodwill towards Connaught, the FTSE 250 social housing group, extending an additional £15m loan despite a series of profit warnings. Within two months, however, it was clear the business was in freefall and administrators moved in.
Months earlier there was a good deal of fretting among Sach and his colleagues over another even more high-profile toxic loan, a £240m credit line to Liverpool football club, owned at the time by American businessmen George Gillett and Tom Hicks. By autumn 2010, the highly indebted club looked to be heading for insolvency – and, as a consequence, a nine-point penalty from the Premiership, likely to further dent its financial performance.
Unless a buyer could be found at the eleventh hour, RBS would have had to step in and rescue the business, writing down debts in exchange for a controlling interest in the club. Bank insiders say plans for such a debt-for-equity swap were drawn up and for several weeks this looked the most likely outcome. In the end, however, another US businessman, John Henry, came to the rescue, acquiring Liverpool through his Fenway Sports Group in a hard-fought deal that allowed RBS to reduce most of its exposure. Gillett and Hicks did their best to remain at the helm, but the bank took the matter to court and the sale was forced through.
This was just one of a rash of large debt-fuelled deals done by the bank in 2007 that have returned to haunt it. This disastrous vintage includes loans to Four Seasons, Samsonite, Jurys Inn and the 42 Marriott hotels.
Other businesses whose shares have made their way onto RBS's balance sheet following restructurings include Barracuda, a 225-strong pub group, and Novus, a London club and cocktail bar business where David Cameron was once a director. Control of Jarvis Hotels also fell to the bank in October, more than 18 months after the group fell into default.
Three months earlier RBS took a stake in Northamptonshire yacht builder Fairline, alongside Jon Moulton's Better Capital, in a debt-for-equity deal.
Sach and his team will face many more make-or-break decisions in 2012. George Osborne may insist that he's not taking the "picking winners" approach to industrial policy discredited in the 1970s, but whether he likes it or not, as the economy turns down over the next 12 months, the Treasury will be ultimately responsible for the fate of scores of RBS-backed companies.
Among the larger firms whose future could turn on the continued support of RBS are high-street chains HMV, Peacocks and Clinton Cards. Also on the watch list are Premier Foods, maker of Bisto, Angel Delight and Hovis; tour operator Thomas Cook; hotels group Jurys Inn; and Endemol, the Dutch TV production house behind Big Brother and Deal or No Deal.
All these companies, which together employ almost 50,000 people, may yet trade out of trouble, but with a prolonged slowdown forecast, experts at RBS, led by Derek Sach, head of global restructuring, are preparing for a busy time.
Should the hoped-for trading recovery not materialise, any of these firms – all of which have recently sought covenant waivers or concessions from RBS and fellow lenders – could ultimately end up being controlled, or part-owned, by their banks, and in turn by the taxpayer. That might not be ideal, but the alternative would be administration.
Britain's state-controlled bank has already seized large stakes in some of its biggest former debtors. These include the world's largest luggage maker, Samsonite – though RBS's 30% holding was cut to 15% when the business floated in Hong Kong this summer – and the UK's biggest care home operator, Four Seasons Healthcare.
This month alone RBS has added big equity stakes in Italian yacht manufacturer Ferretti and Miller Group, Britain's largest privately owned housebuilder, to its expanding equity portfolio. Some 42 Marriott hotels are also owned by the taxpayer's bank, though they're currently up for sale.
RBS decision-makers are under pressure on two fronts: politicians are accusing the bank of choking off credit, particularly for Britain's small and medium-sized businesses, but many in the City believe RBS's weakness is its reluctance to make unpalatable decisions, especially where a large number of jobs are at stake.
One fund manager, who specialises in buying up property freeholds from failing businesses, gives a damning analysis of the prospects for a number of well- known RBS clients on the high street. For example Peacocks is, he says, slowly being crushed under the weight of spiralling loan liabilities.
RBS and another bank agreed in October to extend loan facilities to 2013 for Clinton Cards, which the fund manager is also pessimistic about, adding that the firm is weighed down by "enormous lease liabilities".
Sach is reluctant to talk about specific clients, particularly listed companies, but defends a strategic approach that tolerates poor-performing clients for as long as is practically possible.
"In the recession of the early 1990s, when I joined RBS, banks were castigated for appointing receivers left right and centre," he says. "When I joined the rate at which we did that reduced. This time round it is very different. The financial sector, particularly in the UK, is making much more enlightened decisions.
"Yes, economies can recover faster if bad loans are cut out quickly, but there is a huge social cost – enormous unemployment and business failures. It is better for all concerned to extend and pretend a little."
The tone of these remarks is likely to trigger scoffing among thousands of small business clients of the bank, many of whom complain bitterly of a lack of understanding from RBS, the biggest lender in this area, with about a quarter of the market.
Last February, RBS and other high street lenders signed up to the government's Project Merlin agreement, which imposed targets for business loans. Despite intense pressure from Westminster, it is perhaps the least likely of them to meet its net lending promises.
Lord Oakeshott, the former Liberal Democrat Treasury spokesman, is among the most outspoken campaigners for RBS to increase lending, resigning in March in protest at what he saw as the weakness of the Merlin targets. "The real criticism is the way they're screwing small companies," he said. "Apart from some walking wounded, big companies in general do not have a problem with finance. It is still the small and medium-sized companies that are the problem – and that's where RBS, the market leader, is squeezing harder and harder and harder."
A close ally of business secretary Vince Cable, he called for the government to "take vigorous action, including sacking and replacing directors", if RBS doesn't execute a lending strategy designed to boost jobs and growth.
For his part, Sach claims that his division has carried out some 500 small-firm debt restructurings this year, saving the livelihoods of about 40,000 workers.
In many cases, he argues, it is easy to see that firms are laid low only by excessive earlier borrowings on their balance sheet. Despite the implicit criticism of his lending colleagues' former imprudence, Sach's preferred solution is, wherever possible, for RBS to demand shares in the company in exchange for writing off debt.
And when it comes to big decisions, particularly in relation to large employers, Sach and his colleagues are in close communication with the business secretary's officials.
When debt-ladenThomas Cook, which takes 6.6 million Britons on holiday each year, lurched into a month-long borrowing crisis in October, negotiations between the company and its 17 lending banks even drew public comment from David Cameron. Asked whether he was concerned for the future of the business the prime minister said he had "obviously" asked Cable to keep him up to date on progress; Thomas Cook was "an important and iconic British brand".
Behind the scenes it is perhaps unsurprising that it was RBS restructuring director Bob Hedger who took the lead in talks on behalf of all the banks, even though the largest exposure lay with HSBC, Barclays and Unicredit.
Seeing that debt uncertainty was damaging Thomas Cook's trading prospects, Hedger pressed for a quick resolution. As a result the banks, and RBS in particular, now look certain to stand behind the troubled tour operator for the foreseeable future – even if that eventually means taking an ownership stake.
In all of its lending decisions RBS has to act in the best interests of all its shareholders, but its senior executives are also aware that their largest investor – the Treasury's UKFI asset-owning unit, with 83% of shares – is equally keen for the bank to act in the interests of the wider economy, sustaining lending support and promoting employment wherever possible.
Sach claims the two goals are rarely at odds. "Our first priority is to protect our own balance sheet but that often means doing what you can to save a business. At the end of the day our job is to save companies ... Creditor recoveries are almost always lower in an insolvency."
Privately, however, even ministers agree there comes a point at a failing business where a bank has to intervene decisively to protect a credit exposure. In October RBS and Lloyds Banking Group called time on Britain's largest nightclub operator, Luminar, after a long period of patient support, forcing directors to appoint administrators from Ernst & Young. Behind the scenes the two banks are thought to have taken differing views on the best outcome for that business, with RBS believed to have favoured a debt restructuring deal that would give the banks ownership.
And last year RBS showed goodwill towards Connaught, the FTSE 250 social housing group, extending an additional £15m loan despite a series of profit warnings. Within two months, however, it was clear the business was in freefall and administrators moved in.
Months earlier there was a good deal of fretting among Sach and his colleagues over another even more high-profile toxic loan, a £240m credit line to Liverpool football club, owned at the time by American businessmen George Gillett and Tom Hicks. By autumn 2010, the highly indebted club looked to be heading for insolvency – and, as a consequence, a nine-point penalty from the Premiership, likely to further dent its financial performance.
Unless a buyer could be found at the eleventh hour, RBS would have had to step in and rescue the business, writing down debts in exchange for a controlling interest in the club. Bank insiders say plans for such a debt-for-equity swap were drawn up and for several weeks this looked the most likely outcome. In the end, however, another US businessman, John Henry, came to the rescue, acquiring Liverpool through his Fenway Sports Group in a hard-fought deal that allowed RBS to reduce most of its exposure. Gillett and Hicks did their best to remain at the helm, but the bank took the matter to court and the sale was forced through.
This was just one of a rash of large debt-fuelled deals done by the bank in 2007 that have returned to haunt it. This disastrous vintage includes loans to Four Seasons, Samsonite, Jurys Inn and the 42 Marriott hotels.
Other businesses whose shares have made their way onto RBS's balance sheet following restructurings include Barracuda, a 225-strong pub group, and Novus, a London club and cocktail bar business where David Cameron was once a director. Control of Jarvis Hotels also fell to the bank in October, more than 18 months after the group fell into default.
Three months earlier RBS took a stake in Northamptonshire yacht builder Fairline, alongside Jon Moulton's Better Capital, in a debt-for-equity deal.
Sach and his team will face many more make-or-break decisions in 2012. George Osborne may insist that he's not taking the "picking winners" approach to industrial policy discredited in the 1970s, but whether he likes it or not, as the economy turns down over the next 12 months, the Treasury will be ultimately responsible for the fate of scores of RBS-backed companies.
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