'It's an ill wind that blows nobody any good' applies to the credit crunch as much as to most other situations in which investors find themselves. A contraction in borrowing capacity, falling property prices, bailouts of investment banks and the like is bad for the stock market. But not uniformly so. The reality is that there are beneficiaries to be found
At first sight the omens do not look good. Recent data on building society lending show new home loans are down 68 per cent by value on a year ago. In part this is the result of voluntary action by the building societies themselves in the wake of the Northern Rock debacle. In part it is due to stricter lending criteria being applied. For example, buyers with relatively small deposits are now routinely being refused loans. In the Northern Rock era, mortgages of 100 per cent or even 125 per cent, were on offer.
Nor is the pain confined to the property sector. The credit crunch has been tough on small businesses. Reduced credit availability and higher costs are making life exceptionally difficult. This has resulted in a sharp rise in companies entering administration, with numbers up by 54 per cent in the first quarter of 2008, according to official statistics. The problem is yet to become apparent in individual bankruptcies. These crept up in the first quarter of 2008. But economists see this number rising much further as the full effects of the credit crunch work through.
One area that may not benefit is debt consolidation. Individual voluntary arrangement (IVA) promoters have hit problems due to intense competitive pressure, a shortage of qualified practitioners and a tougher line being taken by creditors. Debt consolidation loans are also often predicated on raising money against a debtor's home. That's a route that is less viable if property prices are falling and a home owner's equity is shrinking. The result has been a rationalisation and recapitalisation, and even a renaming of some of the main players.
Beneficiaries of the credit crunch, though present, may be slow to emerge. Troubled companies may struggle on for months in the hope that something will turn up before admitting reality and calling in the administrators. Individuals may do the same for some time before realising that the old sources of finance are no longer available and that a new discipline has to be applied that involves reining in spending, raising cash and paying down debt.
When the penny drops, however, beneficiaries should include corporate insolvency practitioners and those, like forensic accountants, who make a living from picking over the bones of moribund companies. In the personal sector, leaving aside the debt consolidators and IVA promoters, those best placed to gain are those offering alternatives to debt from the mainstream banking system, and those companies offering investors ways to raise cash and cut spending.
One interesting factor about several of these companies is that many stand on low multiples and have relatively high yields. This suggests that the market has indiscriminately marked down the prices of the leading high-street banks that have the biggest problems, but also those of the lenders and other service providers that may be in a position to pick up customers from them and provide solutions for their credit problems.
A credit crunch and the economic contraction it causes can provide opportunities just as much as threats. What needs to be recognised and fully appreciated is that mainspring of all banking crises: the axiom that 'cash is king', whether for a business or an individual, and that profits can flow to those able to provide it.
