Growing recovery sweeps along all but the smaller firms: A new survey is overwhelmingly positive, John Willcock reports

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The Independent Online
THE clearing bank reporting season, which starts today with TSB, will show significantly reduced bad debt provisions for all the banks, but weak property values will keep provisions at a 'material' level for years to come.

Lloyds Bank is warning that, despite a big upturn in business confidence and activity over the past 18 months, commercial property remains in the doldrums. No big recovery is expected by the market much before 1996.

This has a knock-on effect for banks, since commercial property forms the majority of collateral pledged by companies as security for bank borrowing.

Michael Riding, general manager of Lloyds Bank Commercial Service, said yesterday: 'Bad debt provisions will come down significantly for 1993, but there is still a property overhang. Provisions will continue to be material because of security values.'

Mr Riding said that the second wave of business failures that normally follows a recession in the UK is not happening, but companies with turnover of pounds 1m or so are finding it much more difficult to benefit from the recovery than those with pounds 10m turnover or above.

There are also big variations in the speed of recovery in different parts of the country, but the old North-South divide has disappeared. Instead the North-east, Midlands, Wales and the South-west are lagging behind the rest of the UK.

Mr Riding said that the overall message of Lloyds Bank's third six-monthly 'Business In Britain' survey of 2,000 businesses is overwhelmingly positive, however. It was carried out in November and December 1993.

Mr Riding said: 'This survey clears up any doubts that the UK economic recovery is finally established and under way. This is reflected in increased business confidence and higher order books and sales.'

The upturn in business confidence reported by Lloyds in June 1993 has been sustained, although at a slower rate of improvement in the second half of 1993 than in the first. Wholesale and distribution companies continue to report the greatest improvement, with the construction sector the most pessimistic.

UK business failures continued at a high rate for three to four years after the last couple of recessions, but receiverships are rapidly declining, only 18 months into the present recovery.

Two of the largest firms of insolvency specialists, Coopers & Lybrand and Touche Ross, have recently forecast that 1994 receiverships will fall to less than half their peak level of 1992. And Mr Riding is confident that there will be no 'second wave' of failures caused by companies running out of cash because of orders outstripping working capital.

The survey found that cashflow problems are diminishing, with only 34 per cent of companies reporting difficulties compared with 56 per cent a year ago.

'Perhaps this is because trade payments are proving less of a problem this time,' Mr Riding said. 'Many larger companies are now paying more promptly. It may also be that the recession has shaken out the weaker companies, and the stronger ones that are left are more adept at handling their cashflow.'

Tim Hayward, senior insolvency partner at KPMG Peat Marwick, has seen no signs of a second blip so far. 'I have not seen a single example of a company failing recently because of cashflow difficulties,' Mr Hayward said.

Mr Riding also cited 'the very significant efforts the banks have made to bolster their support teams for troubled companies'.

Lloyds has quadrupled the number of people in its own support department over the past three years, he said. Much of the recent expansion was prompted by expectations of a second wave of failures that has failed to materialise.

'There are also more innovative ways of turning companies around,' Mr Riding said. Banks are funding more management buyouts, swapping more debt for equity, and giving more interest holidays. And more businesses are locking in on low interest rates through long-term, fixed-rate loans. This is alleviating problems caused by businesses' traditional reliance on the overdraft for what should be long-term equity capital, he added.

The most worrying aspect of the survey is the weakness in recovery by smaller firms, especially those with a turnover of below pounds 1m. Generally, higher orders and sales have been translated into higher profits by 35 per cent of companies. Those with turnover of more than pounds 10m have seen the most significant improvement with 40 per cent reporting higher profits than six months ago.

Mr Riding suggests this is due to bigger companies having more muscle to enforce prompt payment, as well as being more confident organisations with greater management expertise in expanding their businesses. 'They also may be more confident of support from their banks,' he said.

(Graphs omitted)

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