The crunch isn't over for property
A long-term decline in values means a ‘second wave of distress’ may soon hit property firms — that’s the warning from super-administrator Neville Kahn.
Good foundations: Deloitte’s Neville Kahn advises firms to “keep an eye on cash flow”
Property developers - indeed investors of every stripe - may wish to avert their eyes. Neville Kahn, the global leader of Deloitte's reorganisation services, who has led the administration of some of the recession's most high-profile casualties, believes it is the property players who could prove to be the fall guys of 2010.
Mr Kahn, who ran the administration of Woolworths, Mosaic and Stylo, says: "Whereas in the first half of 2009, we saw a lot of retailers struggling, the retailers have got their act together and are in a much healthier position.
"Now, we don't have too many retailers on the shelf. We have a lot of property firms, shipping companies, pubs and hotels that have problems with financing."
Why is the property sector about to be badly hit? Because of declining values. "When property businesses are financed, the banks insist on loan-to-value covenants. As the values have come down, even though the companies are able to keep the interest coverage to the bank going, their value has gone down. They are not breaching their cash covenants, but they are breaching their loan-to-value (LTV) covenants. The issue is about who is going to control the realisation of those assets going forward and who is going to take the upside in the current market.
"There is a negotiation about whether the bank should write down its loan and share the upside with the current operator or whether the bank takes the asset itself and works it up to a higher level.
"In a lot of property situations, we are acting either for the property companies or the banks in negotiating a restructuring of their financing. It comes down to who is best placed to extract the value and how that value is going to be shared."
Earlier this year, Mr Kahn was appointed administrator of York-based rail giant Jarvis, which went into receivership in March. "Jarvis had been struggling for many years because of its reducing income from Network Rail. It went through a big restructuring about five years ago and never really managed to secure enough work to keep its cost base covered.
"With Jarvis, we dealt with the railways but also the firm's accommodation services, which provided outsourced services (cleaning and catering) for the Whittington Hospital and JFS. We have managed to keep that going and signed over those contracts to other parties. It was quite a precarious time." They managed to save 800 jobs but redundancies hit staff at the head office in York, as well as in Doncaster, Glasgow, Leeds, Newcastle and Peterborough.
He acknowledges that the cuts that are announced in the public sector will continue to filter through and impact upon the private sector. "The reduced spending is likely to put a lot of private sector companies under pressure. And we expect to feel that in an increase in activity in the last quarter of this year."
But it is not all bad news. Since last year, Deloitte have been seeing more restructuring cases than insolvencies. "Businesses have managed to stabilise a bit and restructure.
"In the past 12 months, the Deloitte reorganisation business has been involved in about 450 businesses and I estimate that in over 90 per cent of those cases there has been no insolvency procedure used.
"Our business is still up 10 per cent year on year but the type of work has been less insolvency and more restructuring. There will still be cost reduction but not mass job losses as with insolvencies."
Perhaps the most high-profile insolvency Mr Kahn has worked on in the past 12 months was international sports broadcaster Setanta, now ESPN, which went into administration in June 2009. "It didn't have a high enough number of subscribers and needed a large injection of capital. Negotiations with the rights owners, such as the Premier League and the Football Association failed, therefore it had to close down." Deloitte managed to save the non-UK part of the firm - the Irish and international businesses survived.
Asked for advice for struggling companies, he says: "The old adage is the best adage: cash is king. Always keep an eye on cash flow. We would expect every company to be forecasting its cash on a weekly basis for three months after restructuring."
Looking forward, the father-of-three says it is vital for management teams to be on top of cost control, business processes, cash flow and customer relationships. "There may well be a second wave of distress and those businesses that concentrate on the four areas will have best chance of survival."
Mr Kahn has recently become a trustee of Norwood, a charity close to his heart. "I have been particularly taken by the work they do. They are implementing new facilities and giving people greater independence to live within the community. I am particularly interested in helping Norwood to navigate change while retaining their existing facilities." He previously set up Norwood's Distressed Investing Dinner Committee.
Mr Kahn is also a trustee of the Jewish Association of Business Ethics, a governor at Kerem school and, on September 6, he and his wife Susie will be hosting a fundraising event for Israeli charity Hazon Yeshaya in their home in Hampstead Garden Suburb, north London.
He says: "Those of us who have the ability to either give their skills or any means back to the community, I think it is incumbent on us to do so."
Sorry, closed: Kahn's big cases
● Woolworths: the chain went into administration in 2008
● Waterford Wedgwood: the china and ceramics firm went into administration in January 2009
● Barratts Shoes and Priceless Shoes: went into administration in January 2009
● The Mosaic group including Coast, Oasis, Warehouse and Karen Millen went into administration in March 2009
● Setanta: the sports broadcaster went into administration in June 2009
● Jarvis: the rail maintenance company went into administration in March 2010