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Double dip recession is certainty, not just for UK

The shocking business investment numbers released yesterday give the lie to the "green shoots myth" for business.

Investment by businesses contracted on a quarter-on-quarter basis by its largest amount since 1985 and its looks like the annual decline this year is likely to be about 18 per cent — the biggest fall, outside wartime, for more than a century.

With that backdrop I cannot see a big recovery or even a small recovery in the economy. We have been saying for some time that companies, to survive the recession, have been cutting costs, reducing employment and now its clear they have also cut investment.

With 180,000 companies not paying PAYE and VAT on time (to survive cashflow crises) it is clear that SME businesses are having to "hunker down" for worse times ahead, by cutting investment, costs and employment.

Alongside consumer tax rises, next year we will see the new Government cut costs, public sector employment and investment too. Smart boards are already planning for that and cutting their cloth to fit. Coupled with falling investment as employment falls, less money will be spent by the consumer, so service sector and retailers in particular will see growth grind to a halt again after a recent rise.

So will this lead to the double dip recession or W shaped recession. Nothing is ever certain but that is what I am thinking as each month goes by.

So what of other countries? The rise in GDP in Japan is interesting. Much of this is probably restocking by companies, remember Japanese manufacturing collapsed last year. So good news for Japan ahead? NO.

This week the worlds largest car manufacturer, Toyota, decided to close a US plant and mothball two production lines (one in Britain), this is the first time in its history it has taken such actions. Does the board of Toyota see growth ahead?

Fujitsu announced 1,200 job losses in the UK . This after shorter working hours did not work in the UK. Falling revenues were to blame. No growth there then.

France and Germany also announced growth in Q2 of 2009. I also think this was driven by restocking and the bringing forward of car sales for example. Ambrose Evans-Pritchard of the Telegraph's recent article also points out that Eurpoean credit contracted recently (ie did not grow).

"We should not succumb to optimism that everything has been overcome. The whole world is in recession together and nobody alone can export their way out of the downturn. The recovery cannot last unless there is rise in global demand, and jobs are created, and there is no sign of that."

"The rebound in Germany and France is not sustainable. The state has stepped in to compensate for the private sector. As long as economic growth relies on the state, you cannot talk about durable recovery."

So lets wait and see, but it looks like a fall in GDP is ahead and it will be late 2010 before meaningful recovery in the major economies and then I think growth will be very sluggish.

What can we do to protect contracts if we propose a CVA?

“We want a CVA but we are worried that our intellectual property would be put at risk, do you have a solution"? Of course we do!

Company Voluntary arrangement with hive down!

We are pragmatic experts who will always try to help you find solutions. By using a CompanyRescue CVA we can restructure viable but distressed companies. Sometimes that requires solving complex problems that can mean a "plain-vanilla" CVA is not workable. So we have used the following methods to address such complex scenarios.

As ever this is only a general guide, we cannot cover every scenario, so if you have a question or problem talk to us soon.

What is a Hive Down?

An asset, or the whole business can be hived down to a newly formed subsidiary of "Topco". Let's call this "Bottomco". It has a new clean balance sheet, no existing liabilities, but of course, no credit rating.

The board of Topco resolves to sell some or all of the assets to its subsidiary Bottomco and the consideration for this transfer is the shares in Bottomco, or cash payment can be made. Perhaps Bottomco could raise new funds to achieve this. The providers of such monies should consider taking appropriate security and or the bank debt in Topco can be "novated" down to Bottomco.

Topco is now an insolvent company, with modest or zero assets other than the shares held in bottomco which are in effect not worth anything much.

Topco can then enter a company voluntary arrangement to repay its creditors (generally not including it's secured creditors) say 30p in £1 over 5 years, or 25p in £1 in 3 months. Bottomco may then pay this to Topco in consideration for the release of the shares.

The supervisor of the CVA can take a charge over the company and its assets (shares in Bottomco) until the CVA contributions are paid over.

After the CVA ends Topco could be wound up or left as holding company for example. The people involved may buy the shares from the liquidator after valuation.

This process avoids what is known as "transaction at an undervalue" which is a breach of s238 Insolvency Act 1986. It is relatively simple in concept but legal advice is essential to avoid personal liability.

What is a Hive Across?

An asset, or the whole business can be hived across to a third party company in consideration for money or shares. This is more complex than a hive down and requires careful planning and legal advice to avoid "transactions at an undervalue" which is a breach of s238 Insolvency Act 1986. Legal advice is essential along with creative advice from CVA experts.

KSA works with one of the UK's top insolvency lawyers to ensure that a CVA with a Hive Down, or a CVA with a Hive Across mechanism are well conceived and designed, properly structured, and powerfully executed.

If this sounds of interest call Keith Steven on 0800 9700539 or 07974 086779 now.

Landlords back Focus DIY CVA

Very interesting and innovative CVA accepted by landlords. 

See Daily Telegraph Coverage here...

http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/6083493/Focus-DIYs-landlords-back-CVA.html

A company voluntary arrangement is a powerful restructuring tool for retailers, manufacturers and service companies with cashflow problems.

See here for a case study of a CVA that KSA Group led last year. http://www.companyrescue.co.uk/case-study/cva-case-study-logistics-and-distribution-company

Focus DIY - The Times writes good article on CVA proposals

Focus DIY CVA creditors meeting is held today (24th August). In the the Times page 39, Marcus Leroux and Rebecca O'Connor have written a good article about the CVA, the background with regards to landlords and creditors and the voting procedure.

This CVA is proposing that the company exits 38 stores, that are closed. The other 180 landlords will be paid full rent but will have to accept monthly payments in arrears. Given that landlords represent 90% of the voting creditors, it is likely that the 38 landlords who are seeing their leases determined, will not be able to vote down the 180 others whose store leases continue, albeit with variations.

The Focus CVA will see leases for empty stores terminated with two payments equivalent to six months’ rent. The DIY chain has 180 stores still trading with the 38 closed outlets costing £12 million a year in rent. While the payout is less than the lease values, it’s more than they would get if the firm went under.

The retailer has also agreed to pay empty NNDR rates on the closed stores, which would provide substantial cash savings for the landlords while they find alternative tenants.

The firm’s secured lenders, HBOS and GMAC, will grant a two year extension to the company’s £50 million revolving credit facility, which is due to expire in December.

This will be another step forward in the pragmatic use of CVAs to restructure debt and leases. The most important feedback that I have seen is that the advisors and the company have both driven this CVA by talking to key creditors about their proposals and gaining a consensual majority approach. Common-sense applies in other words.

This is a key part of our approach to ALL CVAs that we advise on. Talk to the key stakeholders, creditors and build on our initial strategy around those conversations

The recession is nothing compared to a CVA! Good article in "Real Business"

Interesting if factually incorrect article !

It is called a company voluntary arrangement, not "creditors voluntary agreement". It is NOT approved by court, it is approved by creditors.

I admire Richard and his team for sticking it out and getting through the company voluntary arrangement early.

It seems he had little support from the financial sector, them blaming the company for being in CVA is pretty rich when much of the financial sector was in the throes of boom and a spectacular bust.

I am supportive of the HMG's plans to increase the number of CVAs by providing the ability for "super secured lending" into CVA companies. Hopefully, the current consultation period will lead to this being introduced, (parliamentary time permitting).

This will allow new lending to be put ahead of the bank and other debts. Thereby helping the new lender to secure its lending.

There are tremendous opportunities in the UK for small banks and finance houses to provide financial products to people like Richard. CVA's are the best insolvency tool in the world in my view.

What it needs is for HMG, the insolvency profession, banks and professional advisors to recognise that a company proposing a CVA is determined to get money back to its creditors. Morally and financially they MUST support the hard working directors who do this (and don't simply run away from the debt). When pre-pack administrations, liquidations and receiverships are rising fast, I say hats off to Richard and his baord of directors who (like many of our clients) are driven to pay back creditors.

End to the Credit Crunch?

My last post talked about the Bank of England stating that £50bn extra was still required to bail out the economy. Well it seems that the Governor thought it needed more than that! It seems he voted for £75bn extra (total £200bn) and was defeated by the majority going for a total of £175bn.

What does this tell us about the credit problems out there? That there are great strides of progress being made, or that the markets are still locked up?

The news today that Bundesbank is preparing for a second credit crunch in Germany is even more worrying.

Bank thinks economy has not yet bottomed out. £50 billion more needed!

Those green shoots are springing up in the eyes of estate agents and the property world. Prices are rising they say, the recovery is well under way.

In the real world, the Bank of England seems to thinks otherwise. Interest rates have been kept to 0.5% and a further £50bn needs to be pumped into the economy through printing money, sorry "quantitative easing".

In a statement, they said that the UK recession "appears to have been deeper than previously thought" but the pace of contraction has moderated and business surveys suggest that the trough in output is close at hand."

So the bank seems to think the recession is nearly near the bottom. But like the bank, I think real growth is some way off yet.

BUT if you are an economist for Goldman Sachs you have already decided the recession has ended and growth under way !

Jim O'Neil chief economist at Goldman Sachs, said the country had pulled out of the financial crisis and the economy was already growing again.

As he spoke, the FTSE 100 hit a year-high as optimism spread through dealing rooms. By mid-afternoon it had fallen back slightly but was still up 30 points at 4,746.

Surely he doe not have a vested interest in driving markets up does he? Remember Goldman Sachs benefits from movements in markets!

Company Voluntary Arrangements for LLPs

Remember if a business trades as a Limited Liability Partnership and has serious cashflow problems, onerous leases and too many employees equating to serious risk of failure, then company voluntary arrangement is a powerful tool for restructure.

This is suitable for solicitors firms, accountancy firms, venture capital/ private equity investment firms and any viable business trading as a LLP.

Call Keith Steven now for further details: 07974 086779.

In the next 3 months we will be taking part in a seminar/conference to review the CVA process for LLPs and what can be learned from the experience we had earlier this year.

NB: if you are interested please send Keith Steven an email. keiths@ksagroup.co.uk

Cattles Invoice Finance Finds New Home

Good to hear that the good guys and gals of Cattles are now looking forward to a new home, with an announcement yesterday that Anacap Financial Partners has purchased the invoice discounting/ factoring company for £70m.

I had predicted that Cattles IF would find a new home and break away from the distressed parent Cattles plc which has had its shares suspended since April over some financial irregularities and the sacking of much of its executive.

According to a press release we received yesterday, from Cattles IF, its business as usual and the Times reports that the sale should be completed by September.

Having worked with them for many years, we wish the team at Cattles IF (soon to be renamed?) all the best in the future. They have a solid understanding of insolvency, turnaround and company voluntary arrangements (CVAs). We have a number of long running mutual clients and hope we can do many more deals in future.

Pressure on HMRC Time to Pay Deals?

After my blog noted that nearly 180,000 companies are spreading their tax and VAT payments using the HMRC time to pay scheme (TTP) an article has appeared today in the telegraph. Some insolvency practitioners and lawyers are questioning this scheme asking if its encourages insolvent companies to continue trading.

Well yes it does! Of course the terminal business should not continue to trade but those suffering from debtors not paying on time, slower sales are not BUST business. Remember the Government has actively encouraged a company rescue policy for many years and does not want to see unnecessary liquidations and closures. So the scheme is clearly trying to underpin that aim. Of course some companies will abuse with 2, 3 or even more TTP deals.

My own view is that "2 strikes and you're out", should apply. If the company cannot keep up with two deals, it should seek more radical solutions like CVA, liquidation or administration pre-pack.

Below is the Telegraph article, note the IP calling for a published register of "offenders"!

HMRC given green light to push ahead with tax help scheme

Lawyers have given the all-clear to HM Revenue & Customs (HMRC) to continue its "time to pay" tax scheme, amid complaints that the Government is in danger of encouraging companies to continue trading when they are insolvent.

Published: 4:45PM BST 03 Aug 2009

The scheme aimed at helping to ease money pressures on businesses during the recession allows companies to delay PAYE and VAT payments. So far HMRC has approved 177,000 requests involving more than £3bn in taxes. The total includes 23,000 cases where HMRC has agreed a second reprieve for £320m in tax payments.

HMRC says more than 90pc of what it expected to receive has been paid. Around 60pc of the arrangements cover delay periods of up to three months.

Insolvency practitioners have been questioning whether the scheme is putting other businesses at risk.

Andy Wood, a partner in Sheffield-based The P&A Partnership, while welcoming the support for business, says it is potentially allowing thousands of technically insolvent businesses to continue trading. He wants HMRC to publish a register of all businesses benefiting from the scheme to allow suppliers to decide whether they should consider trading.

HMRC acknowledges that it has "limited discretion" in operating the scheme but said that after testing the legal framework it is satisfied that the programme is being "appropriately managed".

An HMRC spokesman said: "HMRC is always ready to enter into realistic arrangements to give a business time to pay the tax it owes. But there will be instances when a business is no longer viable and in those cases HMRC has a duty to take the appropriate action to recover as much of the debt owing to it as it can. These actions are always a last resort."

So will the HMRC continue its largess or will it tighten up and go for my two strikes and you're out approach?
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