UK: Challenging Times For AIM – Time To Batten Down The Hatches Or Fill Your Boots?

We are certainly witnessing the most extraordinary of times in the world of finance. Almost every day brings fresh news of further stress in the financial system. The biggest financial institutions in the world appear crippled while the shortcomings of bailout plans by national governments are starting to become clear.

WHERE ARE WE NOW FOR AIM COMPANIES?

As I write the Icelandic government has seized control of Landsbanki following the UK's forced administration of its UK assets. Kaupthing Singer & Friedlander has also been taken over by the Icelandic authorities. Both of these Icelandic banks had Nomad operations.

It appears that Landsbanki sold Landsbanki Securities, the merged operations of the former Teather & Greenwood and Bridgewell, to its smaller rival Straumur-Burdaras prior to its administration. While Straumur-Burdaras appear to have avoided the melt down which has affected the Icelandic banking sector, at the time of writing it is not clear if that sale has completed.

In the meantime Kaupthing is emphasising that its corporate finance business is contained in a separate company which is not affected by the troubles of its parent company.

But these are not the only Nomads in trouble. In mid July Dawnay Day went into administration and its Nomad business has now disappeared completely.

For those Nomads who have survived financially, there is the question of maintaining their licence for next year given the dearth of deals this year. The AIM team are going to have to tread a careful line to ensure that there remain sufficient resources in the market to look after the regulatory needs of the over 1600 companies which remain on AIM.

But the reduction in the number of qualified Nomads may be the least of the problems facing AIM companies.

The banks have pretty much stopped lending. When that happens the first thing to go is mergers and acquisitions activity – the very lifeblood of growth companies.

While some tightening of financial covenants could have been expected, the rejection of lending propositions in smaller corporate deals will have a significant knock on effect.

As all participants in the AIM market know the raising of equity capital has been extremely difficult for over a year now. The unwillingness of high street banks to lend to quality companies will make working capital statements even harder to make. So equity fundraising will remain difficult and may get even more so.

The sheer size of the rights issues being made by the major high street banks also will have an impact on AIM. The amount of cash they suck out of the system will make it even more difficult for smaller companies to raise funds.

On top of that, investor sentiment in this market must be to protect existing investments first. So any spare cash a fund may have will be earmarked to prop up existing investments rather than to foray into new ones.

But the real problems are bound to start once our cash strapped high street banks start chiselling at existing facilities of smaller quoted borrowers. If their need for cash becomes acute, reductions in overdraft facilities and tightening monitoring and compliance in relation to other types of facility is almost bound to happen.

Late 2006 and early 2007 saw a large number of funds come to the AIM market. Just as we witnessed during the dot com burst in 2001/02, we could see illiquid investors with cold feet calling on such funds to return uninvested cash to shareholders.

It will come as a surprise to no-one that the future looks pretty bleak for some time to come. Yet there are also opportunities.

There are some great deals around for canny investors with cash. Companies with deep pockets and an ability to make shrewd moves should be able to do well. Private investors can fill their boots with undervalued equity.

These are undoubtedly challenging times. And when the prevailing uncertainties are resolved there is no doubt the landscape will have changed irrevocably. But those who thrive in a time of change have lots to look forward to!

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