Monday, 23 February 2009
Rate cut, time to fix?, stubborn LIBOR and valuations
The Bank of England Base Rate was cut today 50 basis points to 1% today, which begs the question, will rates go any lower? Everything that I have read seems to indicate that 1% is where the bottom of the interest rate curve is going to be and is likely to stay there for 2009 and into to 2010.
If we have reached the bottom of the interest rate curve, perhaps it is time to fix in the cost of funding. The latest fixed rate quotes that I have seen at the end of Jan are;
2-year – 2.16% + margin
3-year – 2.75% + margin
5-year – 3.21% + margin
I guess that if this is the bottom of the market then fixed rates will presumably be on the rise going forward – you can see the trend.
From a Bank perspective, there are now only a couple remaining in the Healthcare sector who are lending at margins over Bank of England Base and only one remaining Bank who is lending at Bank of England Base Rate at any serious funding levels. Margins are also on the way up and risk departments of commercial lenders are really driving the Banks at the moment which is why we are seeing loan to value levels being scaled back for lesser quality deals.
In the future, all Banks lending into the commercial sector will probably end up with LIBOR linked products and because of this, I think we will see a greater number of clients using sophisticated financial instruments to mitigate interest rate movement risk. The 3m LIBOR rate (2.16% today) is proving to be quite stubborn in moving quickly down to parity with Base Rate. To an extend, this reflects the mistrust of the Banks of each other. There was an interesting article here that made The Times that was sent to me by a friend at Investec which indicates how this problem might be solved.
Lastly, I had an interesting lunch with one of the top valuation firms within the Healthcare sector the other day. Their general outlook was that values within Healthcare are holding up but because of the lesser number of buyers around, there are less numbers of offers going in on any given business for sale which has a knock on effect of on the values that are achieved for sale.
A lot of the determining factor of value (and this has always been the case) is to do with the quality of the business being valued but this is more important today than ever. The valuers were saying that it is no good for an owner or seller to just have the financials of their business written down on the back of a scrap of paper but to create an audit trail and justification for their valuation, the valuers are now all looking for historic accounts and accurate up–to-date management info.