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March has been a difficult month for the stock market.
With only a few trading days remaining as I write, the FTSE 100 it is down 6%.
Shocking events at various foreign banks and unpleasant news about inflation and interest rates in the country have made the market nervous.
These developments have ramifications not only for UK banks, but also for London-listed companies in other sectors.
There are firms with particular characteristics (which I will talk about shortly) in which the risk has skyrocketed.
However, for many others, I don’t think much has changed. Except its shares are cheaper than they were a month ago!
banking shockwaves
Here is a timeline of those shocking events at overseas banks:
- March 8 – US Silvergate Bank, the lender of choice for cryptocurrency companies, goes into liquidation.
- March 10 – US tech lender Silicon Valley Bank (SVB) collapses (the second largest banking collapse in US history).
- March 12: US Signature Bank, another banker in the crypto industry, also collapses.
- March 19: The Swiss National Bank railways UBS to take over Credit Suisse in an emergency bailout.
There is a risk that bank failures or emergencies will spread to other countries.
At first glance, the largest UK banks do not appear to be particularly at risk. But things could get tough for smaller banks if large numbers of depositors move money to large banks perceived to be “safer.”
Not just from banks
British companies in other sectors have been affected by the events of March.
On the Monday after the collapse of SVB, the London Stock ExchangeThe regulatory news service was awash with statements from FTSE firms (mainly small- and mid-cap tech stocks) detailing their exposure (or lack thereof) to the US lender and/or its UK arm, SVB UK.
By the end of the day, more than 50 FTSE firms had issued statements.
Government intervention has resulted in SVB UK being bought out by HSBC for £1, and the SVB matrix bought by first citizensone of the top 20 banks in the US
However, a troubled banking sector has ongoing implications for companies looking for loans.
credit crunch
In times of stress, banks tend to reduce their lending and try to increase their deposit levels. In other words, strengthen their balance sheets against any unpleasant shock.
The riskiest businesses are often the first victims when lenders reduce the availability of credit.
Such businesses include companies that will be loss making or marginally profitable for the foreseeable future. And struggling businesses that need financing for a turnaround that could take some time and may or may not be successful.
The situation has only been exacerbated by the unpleasant news about UK inflation and interest rates that I mentioned earlier.
Interest rates
On March 22 came the startling revelation that after three months of declines, UK inflation had risen to 10.4% in February.
The next day the Bank of England, which, before the inflation news, was expected to hold the interest rate, raised it for the eleventh time in a row (to 4.25%).
higher risk
In today’s lending and interest rate climate, any company with a weak balance sheet and an urgent need to refinance to continue as a going concern is in a vulnerable position.
Clearly, it will be much more difficult for companies that are making losses, that are marginally profitable, or that are struggling to obtain financing, and for those that are successful, borrowing will be much more expensive.
That is what I meant when I said that there are companies with particular characteristics in which the risk has skyrocketed. I am afraid to see an increase in the number of these companies going bankrupt.
not everything is sadness
On a more positive front, I also said that I thought not much has changed for many companies, except that their stocks have gotten cheaper. I think greed could be the order of the day here.
For example, Intertek, a testing and certification specialist, is one company I’ve seen recently. It expects its financial costs to rise to £40m-£45m in 2023 from £32m last year.
A 25% to 40% increase in debt service costs could be devastating to the type of businesses I talked about earlier. However, Intertek has a strong balance sheet and generates significant free cash flow (£386m last year). You can easily absorb the higher financing costs.
silly bottom line
Even when banks are lending freely and loans are cheap (as has been the case for the past decade), investors should always check a company’s balance sheet and cash flows.
But it’s even more important when credit availability dwindles and higher interest rates make loans more expensive.
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