The Banks are coming! Part II — Banking on reality
In this, our second part of Pat Nolan’s two-part feature on the banks and the licensed trade, he concentrates on how to work with your bank for the best outcome.
Print23 April 2013
Last year, Dublin publican and former LVA Chairman Charlie Chawke spoke out against the banks’ seeming predilection for putting pubs into receivership.
“It is very unfortunate that they’ve called in a lot of decent people — especially in my business in the last two years,” he told the Evening Herald, “A lot of publicans have been called in and closed down. It is just sad. The banks haven’t given any debt-forgiveness yet but they’ll have to, I believe – and the sooner the better and then we can all start again.
“At the moment you can’t pay what you don’t have.”
Elsewhere VFI Chief Executive Padraig Cribben believes that no credit seems available for the licensed trade in today’s banking system.
“The banks are playing around with figures at the moment, giving the impression that they’re lending to small businesses, but they’re simply restsructuring overdrafts into term loans, giving the impression of lending money. There are receiverships going in in various places across the country,” he told Drinks Industry Ireland, “It can create issues for local opposition depending on the approach taken by the receiver and who’s running the business.
“It’s important that the banks give a reasonable opportunity for publicans to work through their problems.”
But it’s not easy to get any information on bank receiverships in the licenced trade. Kavanagh Fennell’s Insolvency Journal.ie prides itself as an informed source on receiverships but refused to even comment on this matter when approched by Drinks Industry Ireland.
Re-assessing pub performance
At one time, Bank of Scotland Ireland’s loan book included €14 billion of real estate loans and €10 billion in a corporate loan book to hotels, pubs and other small businesses.
With some 150,000 customers, BofSI had around eight per cent of the Irish business banking market in the good times.
But Bank of Scotland’s parent company Lloyds appointed Certus to manage its affairs here after it made the decision to pull out in 2010, handing back its banking licence and its deposit money to the Government. Certus is now responsible for managing the loan book and the day-to-day affairs of its loans. It reports back to the UK.
Having now exited the Irish banking scene Bank of Scotland is understood to be selling chunks of its loan book to venture capitalists.
It also seems likely that an influx of such bulk buying offers (seeking significant discounts) on its loan books has led BofS to re-assess the potential performance of its loans here.
“I still feel that their modus operandi is to close-up that loan as quickly as possible,” believes Tony Mc Donagh, a Chartered Accountant & Registered Auditor with L’Estrange & Co, “But perhaps before they do a knee-jerk reaction and sell these loans off in big swoops, they’re going to try to see if they can recover a bit more.”
He still feels too that the whole thing is about recoverability, pointing out, “The Bank of Ireland & AIB never demonstrated an appetite for ‘You owe €10 million so offer us €5 million and we’ll do a settlement’. They never sent out that body language or that vibe at all.
“But the Bank of Scotland through Certus consistantly write to their customers requesting them to review their borrowing situation and perhaps come to them with a proposal”.
When an operation struggles to make full repayments, the first thing to be done is to inform the bank well in advance, advises Tony.
You need to engage with the banks on a ‘no surprise’ basis, agrees LVA Chief Executive Donall O’Keeffe who advocates the retention of professional advice early on.
Working with your bank
Tony McDonagh suggests how best to set about working with your bank for the best outcome.
“You need to start communicating with your bank if you haven’t paid in quite a while,” he says, “The ‘head-in-the-sand’ scenario was perhaps OK up to nine or 12 months ago but now they need to know what’s going on.”
So what should a publican do with an underperforming loan?
“Once you’re paying as much as is available to you on to your bank, that’s a great start as far as the banks are concerned,” he says.
The question of just what is a ‘sustainable’ level of trade in these chastened times has begun to sink home to many lenders who’d heretofore expected unrealistic repayments in today’s fiscal climate.
Business sustainable?
The question of just what is a ‘sustainable’ level of trade in these chastened times has begun to sink home to many lenders who’d heretofore expected unrealistic repayments in today’s fiscal climate.
“They’re adjusting their present demands to the pubs’ repayment ability and incentivising the publican,” believes Tony.
“For example if the customer had been paying the banks an agreed €50,000 per month but is now only able to pay €10,000, some may feel, ‘What’s the point in even paying them the €10,000 a month as it’s only a drop in the ocean and I owe so much?’.
“To put some of the publicans at ease out there: making consistent payments to your bank is crucial. Not making a payment for two or four or eight weeks is not OK. They’ve a major problem with that. Pay weekly if possible. Do your cash analysis weekly. If you can pay €2,500 per week then pay that rather than wait to the end of the month to pay €6,000 or €8,000. Consistent payments are key.
“The banks now feel that if the borrower will work with them, they’ll work with the borrower.”
The bank needs to feel comfortable with the operation, that whatever surplus funds are there after the taxman and creditors have got paid, allows the bank to get its share of the ‘action’.
IBRs & EBITDAs
The tactics employed by Bank of Scotland also appear to have changed.
“They’re talking in the last three or four months of ‘right-sizing’ the loan to what the business can afford, a new phrase, as a result of performing Indepdendent Business Reviews on these operators’ businesses,” explains Tony, “From an information-gathering point-of-view, certainly the Bank of Scotland has got very very active with guys in default over the last three or four months.”
The bank needs to assess the performance of the pub and most will want ‘underperforming’ pubs to undergo an IBR.
IBRs seek lots more information on the monthly accounts, on dealings with the Revenue Commissioners, the state-of-play with the licence, what cost-cutting exercises might have been put in place etc.
“EBITDA – Earnings Before Interest Taxation, Depreciation and Amortisation – is the ‘buzz’ word here now. This is the key driver for what they’re looking for." – Tony McDonagh.
The IBR
The IBR sets out particularly detailed questions that would make a publican re-evaluate his whole business.
In the case of Bank of Scotland, Grant Thornton seems to be the preferred agent for overseeing IBRs. A typical five-page IBR from Grant Thornton seeks three years P&L accounts along with the relevant competition, an analysis of overheads including
exceptional non-cash and non-recurring expenditure and an explanation for fluctuations in gross profits.
It wants to identify fixed & variable costs, year-on-year variances, why the operation is up, why it’s down… It looks at key suppliers: could the publican be doing this better? Has the publican got long-term agreements with suppliers and is he getting all the discounts he should be getting out there in the marketplace? How much time does the operator spend on-site, does he know his business?
“EBITDA – Earnings Before Interest Taxation, Depreciation and Amortisation – is the ‘buzz’ word here now,” says Tony, “This is the key driver for what they’re looking for.
“Perhaps for some guys it’s a bit of a ‘wake-up’ call as to what the banks would expect you, as a borrower, to be doing: looking to the future, checking out your competitors, how has your business developed over the last few years, what sectors are improving for you, how do you raise the bar? Can you do better and if you could do better, would there be more availability of EBITDA to pay the banks back what they’re owed?
“There’s a bit of soul-searching in the IBR but if you can perform well in the IBR you can come to an arrangement or an ‘out’ strategy with the banks,” he cliams.
IBRs not necessarily a route to receivership
“There’s too much worry out there that we’re all going to be put into receivership in the morning,” says Tony, “I don’t believe that to be the case.”
He’s also one of the few who can see it from both sides. Together with David L’Estrange the pair have performing loans out on their pubs The Bleeding Horse in Camden Street, Dublin and the Tolka House in Glasnevin.
What of the residual debt?
Nevertheless, retrieving all the borrowings on the original site value will prove a major problem for the banks and there’s no getting around that. There’s going to be massive write-offs for some of the premises so involved because in the long-term there’s no way that it can be repaid.
So are the banks becoming more realistic in their outlook and attitude to what they can realistically get back in this recession from those they’ve lent to?
Over the last 18 months the banks seem to have accepted that this capital is not coming back to them.
After all, where’s the publican (or anyone else) going to find the money? Who’s going to lend it to him to repay?
Are the banks going to take the businessman out of the market for this? Are they going to pursue him for evermore?
What matters in real terms is what’s going to happen to the residual debt?
When such a loan is ‘parked’, just what does that mean? Is the meter still ticking?
The market is never going to come back.
The issue remains that the businesses are geared to a certain business model that does not exist any more and it’s not going to come back in the future. The problem is not the value today, but should the publican be pursued for the difference for the rest of his life?
The answer lies with the banks – and they’re not saying.
Related Articles
AB InBev UK and C&C Group agree new distribution changes →
Molson Coors reaffirms 2024 full-year guidance →
Pernod Ricard to sell its wine portfolio →
Fans 0
Followers