Thursday, 19 November 2009

The Ticking Bomb

According to Guy Hands, CEO of Private Equity House, Terra Firma, the good days of making a fast buck on leverage buy outs are over. It's no bad thing.

But the really bad news is, as the global markets have gone down, Private Equity Houses have gone into what we would understand as negative equity on our mortgage. As they scramble to renegotiate loans, of which some £420bn are due in 2014, banks are giving them the stonewall treatment as they do not want to increase what are now looking very shaky lending positions.

It's a ticking bomb - if the markets do not recover sufficiently for the Private Equity Houses to sell their leveraged assets for a price which can repay their loans and interest, then they face total ruin. Imagine then what clever companies that have bought toxic debts like 'Protium' from Barclays are facing long term.

Hands asserts that by not renegotiating, banks are going to halt recovery. Once again, it seems that such companies believe the markets and economy revolves around their own ability to make money - as if we all owe them something. The fact is that Private Equity is still doing well in the main and over the last 5 to 10 years, investors have made billions by leveraging huge loans for little capital outlay - the risk taking has been enormous. As with all gambling, you will lose at least some of the time and with such high stakes, one failure can wipe you out totally.

Talking of ticking bombs, public sector borrowing in a typically good month for the taxman was up by a record £11bn in October. Once again, the Treasury miscalled the amount of borrowing as corporation tax collected was a good deal below expected. It seems that the old calculators once again let the Chancellor down and makes Gordon Brown's pledge to halve the budget deficit by 2014 a complete joke if he can't even get it right one month at a time.

Finally, the good news is that Tony Blair's simpering face will not be seen as the first EU President. Thank God for some common sense.

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