Jeremy Warner's Outlook: The insolvency gravy train knows no bounds

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There always has been a lot of money in insolvency, if you happen to be on the right side of it that is, but the £104m of professional fees run up on the restructuring of British Energy really does take the biscuit.

There always has been a lot of money in insolvency, if you happen to be on the right side of it that is, but the £104m of professional fees run up on the restructuring of British Energy really does take the biscuit. The lion's share of this king's ransom goes to the lawyers. Other lucky beneficiaries are investment bankers and accountants. In the context of such largess, it hardly seems worth mentioning the £1.2m spent on public relations, except to question why a company that has essentially gone down the Swanee needs public relations at all. British Energy falls into that category of bad news for which it is impossible to invent a positive spin.

Decent professional services cost money, and it might reasonably be argued that but for such expenditure, creditors would end up even more disadvantaged. Yet too often a big insolvency becomes a self-perpetuating legal and accounting gravy train.

More than 10 years after the event, the BCCI liquidation is still going strong. All exact count has long since been lost of its costs, but by now it must run to hundreds of millions of pounds. The current legal action against the Bank of England alone for alleged regulatory failure is likely to cost £40m.

Deloitte, the liquidators, would counter that they are duty bound to pursue every possible avenue of redress on behalf of creditors, and that in point of fact they have been extraordinarily successful, having already paid out 75p in the pound with more to come. Yet there is something distasteful about the big salaries, first class air tickets and luxury hotel bills that are paid for on the back of other people's misery. Liquidators and their hangers on cannot be expected to work for nothing, but is it really necessary to clock up such obscenely large charges?

In the case of British Energy, the company is plainly no longer in as much trouble as it was when the restructuring plan was hatched. The nuclear power generator has sold so much of its output forward at depressed rates that it is still failing to benefit as potently as it should from soaring wholesale energy prices. But eventually these contracts will work their way out of the system, and it is already apparent that debt holders secured a much better deal than they should have done out of the debt-for-equity swap concocted to salvage the company.

Equity holders get just 2.5 per cent of the new company, plus warrants that may eventually entitle them to a further 5 per cent. If they vote against the plan at the scheduled extraordinary general meeting later this month, the restructuring will go ahead anyway and they will get nothing at all. To add insult to injury, directors stand to get £30m in bonuses if they achieve the targets set for them under the turnaround strategy for earnings, output and other measures of performance. Admittedly, these are not the same people as brought British Energy to its knees. All the same, it's another example of how the spoils of the salvage go to other than those who have lost the most. One hundred and four million just to get completely screwed - now that's what I call value for money.

Rentokil Initial

Sir Clive Thompson, former chairman of Rentokil Initial, used to be known as "Mr Twenty Per Cent". If he were still there, he would have to be rechristened "Mr Minus Twenty Per Cent", for profits now seem to be falling with the same gusto with which they once used to rise. When Sir Clive was unceremoniously executed last May, the stock market was expecting pre-tax profits of about £410m for this year. The coup's organiser, Brian McGowan, said then that in fact profits would be more like £350m. Rather unwisely, he added that Rentokil would make the same again in 2005 or "we will all be dead".

Yesterday came the perhaps inevitable climbdown, proving yet again that, like buses, when bad news comes it tends to come along in threes. Mr McGowan will make the £350m he promised for this year, but he will struggle to make it again next. Normally at this time of year, Mr McGowan would be waxing the skis at his usual wintering ground, his chalet in the Rockies. He took on more than he bargained for when he ousted Sir Clive. It's proving a much tougher haul than he anticipated, as these things usually are, but he claims to be enjoying it, and although the shares keep falling, he's largely delivering according to script.

In Mr McGowan's eyes, the problem with Rentokil under Sir Clive was that it skimped on costs so as to support Sir Clive's targets for growth in earnings. In order to restore top line growth, Mr McGowan is now having to invest heavily in quality of service. Margins and profits are as a consequence suffering. For the time being, there's not much sign of a restoration of decent levels of revenue growth either. Mr McGowan warns that things will get worse before they get better, but he is confident of improvement by the second half of next year. If there isn't, he adds with characteristic candour, "then it is fair to question whether we have been doing the right thing".

For Mr McGowan, doing this job is very much a second coming. Having made his name as chief executive of the conglomerate Williams Holdings, he had an unhappy few years as chairman of House of Fraser, where again he had to deal with a legacy of underinvestment. After that he went into virtual retirement. Why, at the age of 60, would he want to take on the thankless task of Rentokil?

Unkind souls accuse him of a late burst of power lust, a desire to prove himself again at the coal face of industry, yet in truth he is very much the reluctant CEO. Finding a replacement is taking longer than he anticipated. It's like buying a house, he observes. You can't be certain you've got your man until exchange of contracts. So have any firm offers yet been put? He won't say, but in the meantime he's committing the new man, whoever it may be, to a 10 per cent dividend increase next year. He's also somewhat pre-judging what the new CEO's strategy might be by reiterating that there is no point in a break-up beyond a few minor disposals.

Notwithstanding recent setbacks, Rentokil remains a strongly cash generative business. Mr McGowan reckons he's just doing his duty in making it a little less so. The business would eventually have fallen off a cliff if it had carried on in the way Sir Clive had been running it. Yet as ever, bringing expectations into line with reality is proving a painful process. Mr McGowan must wonder why he didn't stick to the Rockies.

OECD off target

The Organisation for Economic Cooperation and Development (OECD) is surely out of touch with reality in suggesting that interest rates in the UK need to rise by a further three-quarters of a percentage point to bring growth back to trend. True, the economy now seems to be growing strongly again after the soft patch it hit in the third quarter, but few would bet on it remaining so if the housing market continues to cool at the rate recent data suggests.

Only two City economists predict base rates at as high as 5.5 per cent (the implied OECD rate) by the end of next year. Many are already forecasting that the next move will be down. The only thing guaranteed to change this view is a fresh surge of confidence in the housing market. While not impossible, such a revival looks at this stage to be unlikely.

So how did the OECD come to get itself so far out on a limb? Who knows, but perhaps it should take note of remarks by Mervyn King, Governor of the Bank of England, before the Treasury Select Committee yesterday. Questioned on why Richard Lambert, a former editor of the Financial Times but not a trained economist, should be on the Monetary Policy Committee, he said: "I judge the quality of the members of the MPC less on whether they write large voluminous research reports, but on the contribution that they makeon a Wednesday afternoon and Thursday morning [before a rate decision] ... I would rather have a few minutes from Richard Lambert getting straight to the point of the question than 30 minutes of rambling by a professional economist." Quite so.

jeremy.warner@independent.co.uk

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