Government's toxic asset insurance slowing economic recovery
City fears leaving asset protection scheme in limbo could damage growth
- guardian.co.uk, Sunday 2 August 2009 15.31 BST
- Article history
The government's programme to insure the toxic assets of partially nationalised banks is delaying an economic recovery and could cost the taxpayer £25bn, the Treasury has admitted.
Although the major banks will report huge writedowns on bad debts this week, the full picture may take many more months to emerge, as the long-delayed asset protection scheme has held up restructuring work on companies whose creditors include RBS and HBOS, part of Lloyds Banking Group. The government announced in February that it would insure £585bn of assets for the two bailed-out banks, but has yet to finalise details of the scheme.
City experts fear that leaving the scheme in limbo could damage recovery by leaving so-called "zombie" companies – those that are unprofitable but haven't been restructured or put into administration – in the market without being able to move on.
"As soon as the rules relating to the APS have been established, the government will be able to get on with the key task of helping the companies concerned return to a viable operation. The worst thing you can do is to do nothing – but I guess this is what's happening now," said David Lovett, the managing director at Alix Partners, an advisory firm.
Under normal circumstances, banks would restructure companies that fail to meet interest payments on their debts. They would typically agree a debt for equity swap, or extend or cancel some of the debt, recovering an average of between 60 and 70p for each pound of debt. But banks are expecting a much higher return on their debts under the insurance scheme, reducing the incentive to restructure a business.
Real estate firms and house builders, particularly hard-hit by the recession, have not been restructured as expected, leaving them in a kind of limbo, experts say. RBS and Lloyds are each exposed to £97bn of commercial real estate assets, BNP Paribas estimates.
Banks, in general, are keeping some of those loans as they want to minimise losses or writedowns through the asset protection scheme. "If you want to minimise your provisions, you can get situations where companies aren't properly fixed," said a leading restructuring adviser. McCarthy & Stone, Britain's biggest builder of retirement homes, is among those partially-restructured, a leading restructuring adviser said.
The company is now re-negotiating its banking covenants after a pre-packaged administration that left the company with as much as £500m of debt earlier this year. Setting new covenants was always part of the plan, the company argues, although specialists say the deal left too much debt in an uncertain market.
"Some people are more driven by wanting to minimise their provisions, rather than fixing the balance sheet properly," the adviser said.
The losses of the bailed-out banks are expected to rise when the APS starts working, as the banks will have to decide which assets need restructuring, and which ones will be put into administration.
The government's own provisions of £25bn related to potential losses on the programme were buried in page 109 of the Treasury's annual report, released last week. Some analysts estimate the figure could be much higher.
"The track record, based on the budget deficit and the borrowing numbers in the budget being too optimistic, would suggest this estimate is too conservative," said Alan Clarke, a UK economist at BNP Paribas, who estimates the scheme will cost taxpayers about £50bn.
Banks, advisers and potential buyers of distressed assets are still waiting for the final details of the scheme, which are not expected to be announced until later this summer at the earliest.
In the meantime, government advisers such as Citigroup and Credit Suisse are earning hefty fees. Top law firm Slaughter & May has already earned £22m in government advisory fees relating to guidance on the insurance scheme and the bail out of financial institutions, including Northern Rock, it emerged in June.
The work on HBOS' insured assets of £260bn is mostly done, but some areas in the RBS portfolio of £325bn have not been addressed, the person said.
"The APS has caused more of a wait and see attitude, rather than a pro-active one," said Tim Babich, managing partner of Fortelus, a hedge fund focused on distressed investments.
The banks deny any withholding on their assets, with RBS stressing that it has 700 staff handling bad loans – its so-called workout department. "It's in everyone's interests to help companies restructure," an RBS spokesman said. "We exist to work for our clients, and we want them to be clients over the long-term, not just the short term. We have also grown the restructuring team from around 150 to about 700 globally in the last couple of years, and they are all busy helping restructure companies."
RBS was Europe's biggest arranger of leveraged loans between 2006 and 2008. Its more than 250 deals represented about 10% of the market, followed by Deutsche Bank, which controlled about 6% of the leveraged loan market, according to Bloomberg data. Many of the RBS deals, such as those involving Martinsa Fadesa, a Spanish construction company, and Ferretti, an Italian yacht maker, have defaulted or needed a debt restructuring to avoid insolvency.
The Treasury says it is still working on the scheme, which will now be headed by former Credit Suisse banker Jeremy Bennett, it was reported yesterday. A Treasury spokesman said: "We are continuing to work with RBS and Lloyds on completing the final terms for the APS. We plan to formally notify the scheme to the European Commission soon."
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