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More chickens are coming home to roost in the U.K.'s challenged banking sector. This time, the feathered fiends are private equity deals backed by the banks at the tail end of the financial boom. The latest issue of the Bank of England's Quarterly Bulletin indicates that £32-billion ($49.2-billion) of leveraged buyout (LBO) debt is expected to mature between 2014 and 2015 and a further £41-billion in the following two years. Among the large deals done in 2007 were the £11-billion buyout of Alliance Boots, the pharmaceutical distributor and EMI, the music company taken private for £3-billion.
Buyouts could be a problem, as the Bank points out that many of the LBO firms are not in a position to repay the principal and will seek to refinance their debts. Unfortunately, says the Bank, "many banks are constrained in providing refinancing options given their focus on balance sheet repair." Most of these LBO deals had a seven-year maturity and the coming financing cliff could turn into a horror if the big European banks close their doors. A recent study by the Financial Services Authority concluded that about of a third of the LBO debt held by British banks was benefiting from forbearance – in other words, the borrowers are in breach but the bank is not pulling the plug. Alternative funding markets, such as junk bonds, are not as well-developed in Europe as they are in the U.S. .
In testimony this week to the Treasury Select Committee, Andrew Bailey, the incoming deputy governor for financial regulation, admitted that Lloyds and RBS, the two biggest banks bailed out by the U.K. taxpayer, might have a funding issue. "I agree there is a need to strengthen the capital position, but I am not going to go into detail," he said in reponse to a query that the sum might be as large as £50-billion.
But the big question, which has already been raised by the incumbent governor, Sir Mervyn King, is whether RBS, which is owned 83 per cent by the government, would get the money if it went cap in hand to pension funds, asking for support. He reckons the government, also known as the taxpayer, should take it on the chin and split the bank up, swallowing the losses.
If the taxpayer won't buy it and pension funds won't back it, what future is there for RBS and the rest of Europe's challenged banks? The extent to which the banks have lost public support was made clear this week when Simon Walker, the director general of the Institute of Directors, a highly conservative pro-business lobby, piled ordure on the banking class in reference to the recent news that 521 bankers at Barclays and RBS were being paid £1-million-plus salaries.
He said: "People outside the communications industry sometimes think that it is possible to spin anything – that the proverbial turd can indeed be polished, if you'll pardon the metaphor. But sometimes it can't – sometimes the underlying facts are the problem, and there is nothing that cunning presentation can do about it other than make it worse."
Carl Mortished is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights.
Carl Mortished