A well-known Yorkshire housebuilder may have gone under, and there are still clearly worries about the banking situation, but Peter Baber finds Yorkshire professionals still upbeat about economic prospects in 2008.
On the face of it, anyone attempting to describe what economic prospects are for Yorkshire in the middle of 2008 can’t help but revert to the old cliché of the elephant in the darkened room that nobody wants to mention.
Essentially the prospects remain good, particularly for exporting, if slowing somewhat, but it’s that unexplored question of the possible impact of the credit crunch that people can’t get their heads around.
And now there are worries about the return of inflation, too.
John Holden, corporate partner at Gordons solicitors in Leeds, is certainly not alone in saying: “These are foolish times and no one knows what the hell is going to happen. But that doesn’t necessarily mean things are going to get worse. We are not doom and gloom merchants.”
Ron McMillan, managing partner for PricewaterhouseCoopers in the north of England, says: “Many major manufacturing businesses are – for the moment at least – relatively unaffected by the problems with the banks.
“Their order books are good and some are reporting very healthy improvements in profitability. Even where they have seen the need for refinancing, they do not see a downturn. But all this could and will get significantly worse if we don’t get the bank situation sorted out.”
There is, indeed, plenty still to get excited about, particularly in manufacturing. The Bank of England reports that, buoyed by a weak pound, many companies are experiencing their best export market in years. “For the first time in years exporting is generally looking more attractive,” says Holden.
Figures can easily bear this out. Research released by Ernst & Young in April even indicates that Yorkshire’s large listed companies have weathered the credit crunch better than any other region in the first quarter of 2008, as profit warnings are actually down on the previous quarter by 25 per cent – from eight to six. All other regions have, over the same period, been reporting increases, while the number of warnings per quarter is still well below the four-year average of ten.
“Despite the global credit crunch impacting in the UK, Yorkshire is reacting well,” says restructuring partner Hunter Kelly. “It is impossible to be certain, but I would put it down to good old Yorkshire common sense from experienced business managers.”
This story, albeit one that could easily be described as talking up the situation, is repeated by many advisers across the region. “I don’t see the economy going into meltdown,” says Stephen Glover, corporate partner at Hammonds. “Yorkshire has a robust economy.”
Even so, more are prepared to admit a more mixed picture. Jonathan Riley, managing partner at Grant Thornton, says: “This is an economy with parts that are competing very well, and others that are struggling like hell. Consort Homes has gone into administration and there are some businesses, particularly in retail and property, that are struggling.”
And Neil Mclean, managing partner at DLA Piper’s offices in Leeds, adds that while the banking situation may resemble something on the verge of an apocalypse, with sovereign wealth funds being called in at a moment’s notice to bail people out, he doesn’t see a particularly bad impact on Yorkshire. “We have a reasonably bullish economy,” he says. “Some companies will fall over, but we will keep going. I envisage great prospects for environmental service companies, for example, in the next 12 months.”
That economy is, of course, reliant on the financial services sector for a good part of its income, and you would think such a situation might be cause for alarm. Certainly the industry in Yorkshire is only too aware of what has been going on with Northern Rock only just across the border in the North East – not least because several Yorkshire-based institutions have been whispered about as companies that could go the same way if conditions do not improve.
The recent hints at write-downs by Bradford & Bingley, and outright calls for cash from shareholders by HBOS, for example, can’t have helped.
However, many advisers view these rumours as idle talk, based purely on the premise that because some of these institutions have a history similar to Northern Rock, it follows that the same thing will happen to them.
Geoff Taylor, newly installed managing partner at the Leeds office of Deloitte, is not unduly worried, and points out, along with many others, that on a national scale those financial institutions that have borne the brunt of any job losses so far have been investment banks – something Yorkshire is largely free of, with the exception of Rensburg Sheppard.
“Yorkshire is doing just fine,” he says. “We do have an interest in financial services, but this is much more about retail financial services and back office operations and they are not as likely to be affected. I certainly cannot see 70 per cent of people in Yorkshire losing their jobs, which, you have to remember, is what happened here during the Great Depression in the 1930s.”
A barometer for the future is how well the deals market is doing. Even here, people are optimistic. McMillan reports that while the front-end due diligence is showing signs of cooling off, there are plenty of deals in the pipeline, even after the changes to capital gains tax, which gave the market something of a fillip in the first quarter of the year.
Corporate lawyers usually only come in at the tail end of any dealmaking, and so are likely to be more aware than most if a drop-off in enquiries means deals never reach that point.
But while Stephen Glover, corporate partner at Hammonds, points out that the market for AIM flotations is pretty much closed, his corporate clients are still looking for possible deals. “They are competitive,” he says. “Middle market deals are good, although one deal we are doing is struggling a bit in terms of finance.”
And Mclean claims that in the first quarter of this year revenues at his office came in over budget. “That was particularly good because back in October 2007 we were all worried about how things would turn out now,” he says. “But I am pretty positive. The corporate deal market is still happening.”
So what, then, is the problem with the banks? And how could they affect performance?
Mel Burrell, managing director of Sheffield-based St Pauls Developments, is certainly at the sharp end of what is happening. “We used to be able to raise 80 per cent of the funding for a new development from the banks,” he says, “but the banks now won’t do more than 60 per cent at the very most. So, you suddenly have a lot more cash to find.”
That may explain why the property market is in the doldrums.
Elsewhere, McMillan thinks it is a case of eroding confidence. “The banks need to start lending to each other again – and soon,” he says. “This is not a liquidity crisis as far as companies are concerned. The worst impact will come from the unavailability of mortgages because if that continues house price values will fall dramatically and confidence will weaken significantly. If the value of your home has suddenly dropped 20 per cent that will certainly be significant for you. For this to improve we need liquidity in the banking market.”
He isn’t yet convinced the £50m the Bank of England has offered will unlock the market and worries that if it doesn’t the government may even need to look again at the issue of bank ownership, “as it can’t afford to see them collapse like a pack of cards”.
“The Federal Reserve came in much earlier, and with more significant funds,” he says, “But there is a moral hazard argument here about not letting profligate bankers off the hook. It’s rather like a game of poker being played.”
Jonathan Riley, however, gets irate with the doom and gloom being whipped up about the banks. “This talk of banks making a loss is ridiculous,” he says. “They have not made a loss. They are putting in provision for the future and these provisions may re-emerge in profit and loss accounts over the next 24 months.
“It is nice for the likes of the Royal Bank of Scotland to have an umbrella like that. It represents prudence. They are also hoping to raise liquidity. In any case, RBS’s rights issue has been well subscribed.”
Taylor, at Deloitte, echoes him in praising RBS for being the first to go to the market. “It is typical of the courage of RBS that is should choose to go first,” he says. “That means they are not going to sell themselves cheaply, but get their shareholders to buy at the current rate and encourage other banks to come forward.”
With HBOS and Cattles following suit, his words appear to have come true already.
In any case, many a Yorkshire adviser will tell you many Yorkshire companies are reaping the benefits of being conservative with their funding and not going out and out for more leverage.
Now is actually a good time for those companies that still have a sound balance sheet, they say, because they can go out and make acquisitions.
Glover says: “If you have a fairly conservatively run balance sheet, are not looking for massive leverage and are sensible about acquisition finance you should get deals away.
“Our clients say they are busier now than they have been for some time. We act for Silent Night, for example, and they are doing very well.”
And Jonathan Riley says that anyone doubting the ability of Yorkshire companies to go out and do that need only look at Fenner, which made six acquisitions last year, and Ultralase, now, thanks to 3i very much back with a UK-based management team and already on the acquisition trail.
There is, however, just a worry about inflation. Even the Bank of England reports that, thanks to increasing food and fuel costs, the true rate of inflation is likely to be much more than the official 2.5 per cent.
McMillan agrees and is particularly worried about the rising cost of oil. “You have to wonder how expensive oil is going to be,” he says. “If someone had said last year that oil was going to reach $120 a barrel I would not have been the only person saying: ‘No, I can’t see it.’ But I don’t believe the price will come down again, as some people are suggesting. Just imagine you are OPEC and you see the global economy can take $120 a barrel. I am sure you would adjust your operations so that $120 barrel becomes the new floor.”
He sees darker clouds looming over the first two quarters of his practice’s new financial year – the past two quarters of this year for the rest of us – unless the banking situation clears. “If the banking situation doesn’t get sorted out soon the impact will be much more profound,” he says.
Others are more hopeful. Taylor admits that if things do get tighter, “a lot of sectors will not have a lot of room for manoeuvre”.
We are not going to see double-digit growth,” he says. “However, we won’t see businesses going under as we did in the 1980s and 1990s. Even the banks want to restructure companies rather than wind them up now.”