Buchler Phillips Quarterly Bulletin No.3

Sink low, sweet chariot

Early baths all round for England’s sportsmen this year, it seems. Within six months of the national cricket team’s early exit from the ICC World Cup, Chris Robshaw’s side became the first ever Rugby World Cup hosts to crash out in the pool stages. As in business, the buck stops with managers, who quickly face calls to be shown the door. If England’s rugby squad were a company, it could be time to call in experienced turnaround experts – that’s if they’re not too busy fixing the woeful lack of talent in English football: home grown players are now less represented in the 2015-16 Champions League than Israel and Belarus.

The Great Wall of money

Chinese Premier Xi Jinping’s State Visit to the UK, the latest stage of George Osborne’s campaign for closer commercial ties, has naturally refocused attention on slowing growth in the world’s second largest economy. Perspective is needed here. The consensus of GDP forecasts sees China still producing annual growth of more than 6% in 2020 – as far out as estimates go. Its GDP value in the next five years is expected to grow from 60% of the largest economy (the US) to more than 70%. Given that China makes up only a small proportion of UK exports, the direct impact of its slower growth is likely to be minimal. On the plus side, the downward pressure of Chinese demand on oil prices is helping to keep UK inflation and interest rates low – good news eventually for company balance sheets, personal solvency and consumer demand. 

Problems at the pump

The flip side of sustained lower oil prices is the rising number of insolvencies in the oil services sector and among smaller exploration and production (E&P) businesses. Pressure at the E&P end from lower overall demand is invariably passed down the supply chain to service companies, rig operators and the like. A number of important restructuring and balance sheet issues are peculiar to the sector – reserves based lending, oil price hedging, decommissioning and safety arrangements and complex joint venture structures. Expect opportunistic acquisitions and defensive mergers, as well as a raft of smaller asset sales by stricken operators as further covenant breaches loom.

Another bite out of the food industry

While established UK supermarket groups rethink their models to keep pace with aggressive pricing from fast growing German discounters, there remains little hope for the increasingly squeezed supply chain. Dairy farmers may have begun to fight back, but food manufacturers continue to live with the threats of late payment, squeezed margins and loyalty payments to major retailers. Moves by store chains to take some areas of food production in-house can only pile on the misery, while market share gains by foreign competitors will mean more supplies from overseas. Talk of green shoots in the supply chain as supermarket price wars begin to settle down is wishful thinking.

Sister Act

The Small Business, Enterprise and Employment Act (SBEE Act) 2015 gained Royal Assent in March, with first changes having come into force from May and further provisions taking effect in recent months. The Act was designed to “make the UK the most attractive place to start, finance and grow a business, not least by reducing red tape for SMEs. Not surprisingly, there are provisions to strengthen the insolvency regulatory regime, so that SMEs may have greater confidence in the overall insolvency and restructuring framework.

The SBEE Act amends the 1986 Insolvency Act to introduce new powers for administrators to have the same rights as liquidators, notably in bringing wrongful or fraudulent trading actions against Directors and assigning causes of action. Procedural changes include abolishing physical meeting of creditors, extending an administrator’s term of office and distributing a prescribed part payment to unsecured creditors. By significantly reducing Court involvement, the new rules are expected to make it far easier for insolvency practitioners to allow a business to continue trading while seeking buyers for it as a going concern – helping to save companies and jobs, while recovering as much as possible for creditors.

UK outlook

Forecasts for base rate rises are beginning to drift further out, with a growing number of analysts not expecting any hike from the 0.5% of the last six years until at least the second half of 2016. The Bank of England's quarterly Inflation Report on August 6 captured consensus forecasts: a rate of 1pc by autumn 2016, 1.7pc by 2017 and 2.3pc by 2018, still pursuing a gentle course of quarter-point increases.. UK quarterly GDP growth improved from 0.3% Q1 2015 to 0.7% in Q2 2015,and retreated in Q3 to 0.5% largely due to the effects of the BRICS downturn. However, Inflation in September fell to -0.1%, returning to negative territory for the first time since April. Food prices fell for the 15th month in a row, while petrol prices remained low. The prospects for the economy are far from bullish and few SMEs are loosening their belts for investments due to the lack of confidence in the global economy.