Outlook: Banks are desperate to salvage their Marconi reputations

Cloudy for Royal Sun; Bargain hunting

Fred Goodwin of Royal Bank of Scotland and Matt Barratt of Barclays do not at first sight seem the natural proprietors of an electronics company, but that is what they are about to become once Marconi agrees its debt-for-equity swap. Barclays and RBS are among a group of some two dozen banks who are prepared to scrub £1bn of syndicated loans in return for enough shares to leave today's shareholders with only 1 per cent of the equity.

Enough has been written about the culpability of Lord Simpson of Dunkeld and John Mayo, respectively Marconi's former chairman and chief executive, who set the company on a telecoms spending spree that has ultimately brought it to its knees. Arguably the banks can look back ruefully on their part in the débâcle: after all, they lent Marconi the financial ammunition without which a large chunk of that spree would not have been possible. We often think of banks as lending impartially to customers of good standing, but their duty to their shareholders is to approve loans that will be paid back. Four years ago, when the money was handed over, Marconi was a sound company and Lord Simpson and Mr Mayo had reputations to die for. It was not a question of "why do you need this loan?" so much as "how many noughts shall we add?". Now those reputations lie in tatters and the banks have taken an ocean-sized bath.

That, however, is in the past. More intriguing now is why the banks want to take control of Marconi, tying up years of management time in the faint hope of earning a return at some stage in the remote future, rather than ordering a straightforward liquidation of a business that is clearly as near to being bust as makes no difference.

What is left of the company will still have debts, even after its cash pile has been plundered to the tune of around £1bn, giving it even less flexibility to resuscitate itself.

A principal reason for the banks' decision to take this route is doubtless the present management's plea that it can make a go of the remaining business. And the banks' tolerance may have been strengthened by the public relations consideration of not wishing to be seen to be throwing the workforce out on to the street. But the individual businesses could still have been sold as going concerns, in a constructive and positive manner – something which Mr Mayo was at pains recently to point out had already taken place in sales he had organised.

The cynical verdict is that the banks want to brush their mistake under the carpet while keeping Marconi going as an identifiable entity, even though it is virtually unrecognisable from what it was. Or maybe, like the card player with a pair of deuces, they just hope something will, Micawberishly, turn up.

Cloudy for Royal Sun

The sun has not come out for Royal & SunAlliance (RSA) for some time now. Its share price is in the doldrums and, do what it may, it cannot convince the City it has enough money to continue to compete with the big boys.

Capital is king for insurers because every scrap of business they do must be underwritten by the same sum in reserves. The issue is particularly pressing at the moment because premiums have risen to heady proportions in the last six months. But, as happens in this highly cyclical industry, the clock is ticking before premiums sink back down again.

RSA in fact admits that the £725m it raised in its recent fire sale of chunks of the business is not adequate if it wants to benefit from these lucrative times.

But the concern is that now the fire sale is complete, there are not many options for raising further money. And, while it struggles to dream up some new cash-generative strategies, others are snapping up all the juicy new business.

RSA was expected to opt for a rights issue but it has changed its mind because the discount would have to be massive. Some investors have also hinted they would not hand their cash over while Bob Mendelsohn, RSA's charismatic chief executive, still sits in the hot seat.

Credit Suisse First Boston yesterday published a note suggesting RSA could drum up an extra £1bn by doubling the amount of reinsurance it has. The company is also working on a complex deal to securitise part of its life insurance business in the capital markets in the hope that it will yield a further £100m. The trouble with both plans is that they throw out distress signals. Complex financial engineering is what Independent Insurance used to disguise a gaping hole in its balance sheet before it collapsed last year, becoming the largest insolvency in the industry for years.

RSA bears no resemblance to Independent Insurance. But the Financial Services Authority is suspicious of insurers in general relying on reinsurance. So are investors, and RSA will do nothing to qualm the City's fears about its prospects if it goes down this route.

Bargain hunting

The Slaters are back in town. Jim Slater, legendary stock market gunslinger of the Sixties and Seventies, and his son Mark are busy picking up unconsidered trifles through their own quoted company, Galahad. While they are characteristically coy about calling the end of the bear market, they have certainly decided that there are bargains to be had among the rubble of crumbling share prices.

Jim, now 73, is convinced that the bear market has not yet run its course and he and his son are concentrating on finding sound companies selling on low multiples of earnings. He has been buying Bellway and Countryside, the builders, both of which are on price-earnings ratios of 6 compared with the current market average of 15.

While we tend to gauge a stock market by the behaviour of its key indices, whether it is the FTSE 100 or the Dow Jones Industrial Average, those indices sum up many varied performances by different companies and their shares. It is a commonplace belief that the collapse in the FTSE has been caused mainly by falls in bank, technology and pharmaceutical shares.

But the Slaters are looking for the anomalies in relation to corporate earnings and yield which always arise when a market is gripped by greed or, as has been happening lately, fear. At such times the good are dragged down with the bad.

It is not enough for a share to have a yield bigger than the interest on a bank deposit account. That can just be a sign that the dividend is about to be cut, as Royal & SunAlliance did last week.

The Slaters are by no means infallible in this search for value. But successful investment is about doing better than average, and by that yardstick they have done well.

But finding the gems among the dross involves good information and painstaking analytical work. For those who do not possess such skills, the alternative is to follow the best stockpickers among the fund managers, such as Anthony Bolton of Fidelity or Neil Woodford of Invesco Perpetual.

But do not be lulled into thinking that the bear market is over, just because some investors are making money. That will not become clear for a good while yet.

w.kay@independent.co.uk