A Time to Invest

It’s March and slowly a few tiny green shoots are emerging in Britain’s wintry economic landscape. A majority of economists believe the UK will just escape a double dip recession and, in the Eurozone, Greece has been hauled back from the brink of collapse. So will the slight thaw encourage businesses, the engine of the British economy, to finally switch from saving cash to funding investment and expansion? And if not, what is holding them back given the UK’s historically low interest rate?

By Helen Power, Financial Journalist

Corporate spending remains bleak

The overall business investment picture remains bleak. The British Bankers Association’s (BBA) latest figures for corporate lending show businesses borrowed £2.8 billion less in January than they did at the same period in 2011, a cut-back that compounded a £2.2 billion reduction in December. 2011 figures from the Office for National Statistics (ONS) suggest low borrowing levels acted as a cap on business investment, with companies continuing to pay down debt rather than expand. Seasonally adjusted ONS figures for the final quarter of 2010 show business investment fell by £1.7 billion.

Most British banks did hit last year’s Government’s Merlin lending targets making £190 million available for corporate loans last year, but the BBA says muted demand from companies led to a slow take-up of the funds. Barclays, which hit its overall Merlin target and its SME lending target, increased overall corporate lending last year against a market-wide drop of £10 billion, thus increasing UK lending market share.

"We are very much open for business," says Alan Turner, Head of Debt Finance, Corporate Banking at Barclays.

Turner believes the uncertain economic outlook - which has been clouded by the Eurozone crisis and a possibility of a double-dip recession for much of the last nine months - is deterring corporate borrowers. "The biggest single variable for business borrowers who want to take on more debt is that it’s very hard to know exactly what this year will hold for the economy," he says. "It is the fear of a future contraction that holds companies back from investing,” adds PriceWaterhouseCoopers Banking Partner Andrew Gray.

But a few entrepreneurs are investing

Several forward-looking Barclays clients are braving the economic uncertainty to strike out and buy rivals or expand their offerings while loans are relatively cheap and there are bargains to be had. "It’s about the attitude and confidence of management," says Turner. Tim Harman, managing editor of Annodata Group, a print and document services provider and longstanding Barclays client, has grown his company from an initial investment of £10,000 when he founded the business in 1988 to a £70 million giant.

"I think our competitors are missing out on an opportunity to pick up bargains. But they have problems on their own doorstep, they are still trying to shore up their own balance sheets," says Harman.
Cash-rich Annodata, which has no bank borrowings, bucked last year’s cautious trend to increase spending by 25 per cent after making two bolt-on acquisitions in October.
"All acquisitions so far have been self funded, but if we did identify a big enough target that required funding then, yes, we would think about borrowing to fund it."

Breedon Aggregates, a Barclays client operating in construction, has also been on a buying spree. The aggregates group was created in 2010 through the reverse acquisition by AIM-listed Marwyn Materials of the former Ennstone business, then in administration. The management team, headed by industry veterans Peter Tom and Simon Vivian, secured strong support from Breedon’s lenders, led by Barclays, through a restructured five-year debt package which is enabling the group to realise its ambitions as a consolidator at the smaller end of the heavyside building materials sector.

The group has already made two major purchases over the last 12 months: C&G Concrete and Nottingham Readymix. This year it will consider bidding for any assets divested by Tarmac and Lafarge as they seek to push through their joint venture. "We have very supportive banks and shareholders,” says head of communications, Steve Jacobs. "Our lenders believe we have the right management team and they trust us to get them their money back."

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