Merseyside’s private sector faces more big challenges in 2011. Tony McDonough reports

BUSINESSES across Merseyside face a three-pronged threat to their survival this year in the shape of debt refinancing, the VAT rise and public spending cuts.

It could be argued that the Liverpool city region economy has emerged from the latest recession in reasonable shape, compared to how it fared in previous downturns.

Earlier this week, the Daily Post reported that Liverpool lost 450 businesses during the recession.

This 3.1% retrenchment was greater than the North West average and much worse than the 2.3% decline experienced across the UK.

Liverpool was the best-performing authority in Merseyside, where there was a net fall of 1,600 businesses to 38,220, a county-wide drop of 4.1%.

For those that have survived, big threats still lurk in 2011.

Accountancy firm KPMG senior partner Ian Goalen, who is based in Liverpool, warns of a “looming debt bubble”.

He says many loans that were arranged pre-credit crunch at favourable rates are now due for refinancing and, with the banks continuing to be stingy with their cash, this could spell trouble for some companies.

Mr Goalen told LDP Business: “Banking conditions remain challenging and we anticipate a high volume of refinancing activity in the next 24 months as three and five-year loans, arranged pre- credit crunch, must be refinanced ahead of maturity.

“The banks are faced with pressures to recapitalise their balance sheets and hold higher levels of reserves.

“As a result, the capital available to support loan renewals will be squeezed and the scales will again heavily tip towards the lender side,” he said.

The debt market will get busier, in line with the unwinding of the country’s refinancing mountain, leading firms with good and bad creditworthiness to seek funding, forecasts Mr Goalen.

He added: “It will be essential for those businesses with good credit to move quickly and stand out from the crowd to ensure they attract the best possible terms, while banks must ensure they back the right borrowers.”

However, Mr Goalen welcomed the steady return to the market of the private equity houses and says they could help partly fill the gap left by the banks.

In December, the North West’s £185m venture capital loan fund finally went live.

The North West Fund will provide venture capital and loan funding to existing and start-up businesses across the region.

More than £70m – around 40% – of the fund will be ring-fenced for Merseyside firms.

NWF’s aim is to pull in a further £200m of private sector funding and create or safeguard up to 14,000 jobs.

Merseyside Special Investment Fund is also looking to invest in local firms.

Mr Goalen added: “Our mergers and acquisitions team tells me that deal activity across the region is continuing to pick up – not least because vendors who wanted to sell their business two or three years ago, but didn't because the market collapsed, are still keen to exit.

“Couple this with the fact that private equity buyers are steadily returning to the market as they look to demonstrate to their investors that they are doing business, and it looks like there may be an M&A sweet spot ahead.

“So, as we look forward to the New Year, the reasons for optimism and concern are equally balanced.

“The set of scales isn’t out of kilter – but it could tip either way with a few ounces added.”

Frank McKenna, chairman of private sector lobby group, Downtown Liverpool In Business, is also concerned about debt refinancing.

He said: “Bank funding for small businesses remains high on the political agenda.

“Prior to the credit crunch, the banks were far too easy with their cash – now they have gone too far the other way.

“I wouldn’t expect a lot of movement from the banks this year, but I would hope other models, like venture capital, will come forward and provide much- needed finance.” Both Mr McKenna and Mr Goalen also spoke of their concerns about the impact of the Government’s savage public spending cuts in Merseyside.

The city region has a high reliance on public sector employment compared to the rest of the country, and it is estimated up to 16,000 jobs could be lost here over the next four years.

And Mr McKenna points out that the effects go beyond the direct loss of public sector jobs.

He said “What is not fully appreciated is the effects the cuts may have on the public sector supply chain.

“Many firms depend on public sector contracts, so some of them may find it tough.”

Mr Goalen acknowledges this, but adds the cuts could also present opportunities.

“Even though growth this year has been revised upwards, the theory that private sector demand will strengthen as the Government retrenches is still to be put the test.

“There is no doubt that the wholesale changes about to take place within Merseyside’s public sector will have an impact upon local businesses.

“Yet it is up to them to turn what could be a threat into a success story. Those smaller businesses currently supplying products or services to the public sector have a tremendous opportunity to re- engineer their method of delivery for the benefit of all.

“With public sector organisations looking to reduce the cost of buying from external suppliers, private businesses that are quick to adapt could see themselves in a strong position.

“On the flip side of the coin, of course, is the fear that the cuts will have a negative impact upon the private sector. Certainly for those businesses which have an over-reliance upon the public sector, absorbing a reduction in public sector spend could quickly lead to cashflow problems.”

Mr McKenna also claimed that many people were not appreciating what impact the rise in VAT, from 17.5% to 20%, could have on businesses.

The retail and leisure sector has become a key component of Liverpool city centre’s renaissance in recent years.

Liverpool One, the Echo Arena and BT Convention Centre and a host of new hotels have all appeared close to the city waterfront and beyond. Such sectors are particularly vulnerable to the VAT rise, as it may lead to consumers cutting back on leisure and retail spend.

“No one quite knows how the VAT rise will impact on businesses in Liverpool,” said Mr McKenna.

“I don’t think people fully appreciate the negative impact it could have on the retail sector.”

Liverpool Chamber of Commerce chief executive, Jack Stopforth, is more optimistic that Liverpool businesses can cope with the VAT rise.

He said: “I think people have been adjusting their spending patterns anyway since 2008, so maybe this won’t have has much effect on spending as we fear.

“Also, I think there is still a novelty effect of the quality of the offer available at Liverpool One, and there is some hope the momentum will be maintained into this year.

“I think the bigger impact of the VAT rise on businesses will be through fuel prices when combined with the increase in fuel duty.

“That is really going to push up costs.”