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How to Profit From Britain's Bank Lending Drought

Companies / Credit Crisis 2009 Jul 30, 2009 - 07:50 AM GMT

By: Money_Morning


Best Financial Markets Analysis ArticleDespite Chancellor Alistair Darling's desperate pleas, Britain's banks simply aren't doing as they're told. In June, bank lending to British businesses fell year-on-year for the first time ever recorded, according to the Bank of England.

That's bad news for the economy. Businesses need money to expand and in many cases to stay afloat.

But it also provides us with an opportunity. Banks aren't the only sources of cash. If companies can't get the money they need from their local bank manager, they'll find other ways to do so.

And two companies that you can invest in look set to coin it from corporate cash-raising...

This lending drought could cause huge problems for UK plc

Lending by banks to UK businesses that make or sell things has been on the slide for months.

British banks just aren't lending like they used to. Either their balance sheets are in such a dreadful state that they can't afford to take any more risks, or they simply want to avoid making all the same mistakes all over again.

Even so, yesterday's news that lending to British 'non-financial' firms had fallen 1.2% year-on-year still came as quite a shock. British companies have never borrowed less than they did in the previous 12 months since the Bank began keeping data in 1998.

With many firms' profits and cash flow now being squeezed by both falling sales and lower profit margins, that doesn't bode well for UK plc. If already cash-strapped companies are forced to borrow less than they were, they won't be able to fund their working capital. In other words, they'll have to reduce the stock they hold, and will lose further sales because they can't extend customers' credit.

What's more, costs will have to be cut, more jobs will be chopped and capital expenditure plans – the key to the future growth of the business – will have to be slashed too.

That's not a recipe for economic recovery, despite the fact that the pundits seem increasingly keen to believe that one is just around the corner.
So bad news all round, then?

Companies are finding other ways to raise cash

Actually, no. Companies are finding other ways to raise cash – such as rights issues.

These are where quoted companies sell more of their shares to investors at a discount to the current price, giving existing shareholders first dibs on the stock offering. With the FTSE All-Share index up 30% from its March lows, businesses are now looking to cash in on their bouncing share prices by replacing bank borrowings with inflows of fresh capital.

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Of course, companies in need of new money won't be the healthiest. Further, an extra supply of shares is often bad for those firms' share prices. But for the guys that help them rake in the fresh cash, corporate fees are a great earner. We recently saw how Goldman Sachs coined more money in its most recent quarterly results than the investment bank had ever racked up before.

Yet Goldman's share price has already doubled from its lows to within 35% of its all-time high, and now yields just 0.9%. So there's probably not much value left there.

Two stocks to make the most of the rights issue boom

However, Goldman doesn't have a monopoly on rights issues. So how about two smaller British broking firms which are also set to do well by advising medium-sized UK companies in a 'cash call dash'?

"The mid-cap area of corporates too small to make the FTSE 100 but of a sufficient size and vibrancy to need access to capital is increasingly the hunting ground of a new breed of middle-ranking brokers", says Martin Waller in The Times. Firms such as Collins Stewart (LSE: CLST), and Numis Securities (LSE: NUM) "have done well even in the market turmoil by concentrating on an old-fashioned approach".

Further, these firms have been picking up clients from broking business that have left the scene. Numis alone has gained 37 new corporate clients over the past nine months, says boss Oliver Hemsley, increasing the firm's list to 120. At the moment, none of those are in the FTSE 100, but some chunky rights issues, earning lots of healthy fees for the company advisors, could one day change all that.

And the joy for investors is that although these firms' share prices have picked up from their lows, Numis is still down almost two-thirds from its highs of three years ago while Collins Stewart is over 70% lower. Numis is on a forecast p/e for next year of 15x reported earnings, dropping to 11x the year after, with a 4.5% forward yield. Collins Stewart is cheaper on 11x expected 2010 earnings, with a 4.4% yield.

They could be just the stocks to make the most of an ongoing rights issue boom.

By David Stevenson for Money Morning , the free daily investment email from MoneyWeek magazine .

© 2009 Copyright Money Week - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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