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Tuesday, 9 July 2013

Are Bank Turnaround Departments Taking Advantage of "Zombies"?

Another great debate looms on the subject of struggling companies being placed into the banks' intensive care departments and then having to accept charges, large fees for external advisors to carry out independent business reviews (IBRs ) and possibly being packaged up for sale against the board's will.

This is highlighted in an article by James Hurley in the Telegraph online today  Last year, James highlighted the issues of asset based lenders charging large exit fees to "knock down" ailing companies through pre-pack administrations and colluding with insolvency firms to so do. Has James uncovered another major issue here is the question therefore?

Well yes and no. Yes because the banks have thousands of sub prime lends to failing companies, how to handle them? How would you handle this?

No, because this is a policy that has been in force since the banks set up recovery departments in the mid 90s. So not a lot new since then really.

What many people may not know is that many of these teams like Global Restructuring Group (RBS) have a mandate to collect fees to cover their risk, take equity stakes in the hoped-for "upside" and charge much higher interest rates/penalties.

One of the people in Hurley's article complained of paying over quarter of a million in such costs. What was not explained was how much debt was involved. The bank would argue why as a stakeholder shouldn't it take costs and equity?

So is James right to highlight this? Yes we think that the banks are at times acting as shadow directors in turnaround situations, for example we are often told by invoice finance houses or bank managers controlling overdrawn bank accounts, that our client may not draw down money legitimately available under their contracted facility to pay anyone - unless they  (the lender that is) agree who it is to be paid to. Is that not acting as a shadow director? It is in our view. Why would a bank manager know who to pay and who not to pay, for mission critical business issues?

Banks insist that their so-called "panel firms" are brought in to advise a board, when often the board has taken independent insolvency advice already. Often this sharply increases fees when it is simply not required. If anything the "panel" is  a closed shop, only select few insolvency advisors are allowed to be on that panel, mainly the largest firms in the industry are allowed.

We argue that this is stifling competition from, smaller more nimble firms with wide expertise in turnaround and insolvency.

If the board and shareholders are taking active turnaround steps and seeking to work with stakeholders like the banks, why impose another raft of costs and impose huge costs in extra management time? Is this the classic "cover your backside" in action?

However, if the board is not acting, then we agree that the banks should be taking active steps to introduce independent advisors.

Your thoughts on this subject would be appreciated?

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