Lloyds Bank: Supporting Growth in Manufacturing

Economic overview

The most recent manufacturing sector outlook produced by Lloyds Bank’s Economist Research team highlights that manufacturing may have turned a corner. There is no doubt that manufacturers were shaken by the events of the eurozone crisis in the latter part of 2011, and this has had an impact on exports. UK manufacturing output rose by 2% in 2011, but that was frontloaded in the first half of the year. While the situation in Europe remains a concern, it now seems unlikely the global economy will fall back into recession. As a result, Lloyds Bank is now forecasting modest growth in manufacturing output of 0.5% in 2012 and then a steeper increase of 2.5% in 2013.

Has manufacturing turned a corner?

Although manufacturers cannot – and do not – expect to ride on a wave of rapid growth across the sector, there are some reasons to feel quietly buoyant. The relationship team at Lloyds Bank Wholesale Banking and Markets, supporting manufacturing companies with turnovers over £15 million have seen the mantra ‘cash is king’ widely adopted across the sector. Carl Williamson, Relationship Director, Manufacturing sector, comments, that “the move to deleverage following the 2008 banking crisis has resulted in strengthened balance sheets, a build-up of cash reserves and low debt levels. In short, UK manufacturers are currently sitting on healthy balance sheets.”

In other economic environments, such strong balance sheets would support an increase in M&A activity. However, the caution highlighted by Lloyds Bank’s own economic research mirrors the sentiment amongst manufacturers themselves. Carl Williamson says that while the eurozone crisis has moved out of the headlines, concern about the economies in Southern Europe means that manufacturers are likely to keep their powder dry in the short to medium term. Stuart Apperley, also a Relationship Director in the Manufacturing sector agrees. “With leverage now seen as a dirty word,” he says, “manufacturers are going to struggle to build the equity levels required for successful large acquisitions”.

Nonetheless, the eurozone crisis, like many other major economic events, has created certain opportunities to offset the risks. Carl Williamson notes, “With Europe in crisis, manufacturers are starting to look further afield for export opportunities, particularly in China. Exporting to China is a step change but with its rising middle classes China no longer boasts the cheapest labour costs which, combined with stronger balance sheets and fewer opportunities closer to home, contribute to an increased interest in the region. So rather than large scale activity, it will be the smaller opportunities such as these, where there is a strong business rationale, which will drive M&A activity in the manufacturing sector in the short term.”

Accessing finance for acquisition.

While manufacturers continue to deal with the hangover from the financial crisis and slow growth in the developed world, the focus is primarily on making existing assets work harder. According to Martin Cooper, Director Large & Major Corporates at Lloyds TSB Commercial Finance, “The current market conditions are actually supporting a return to management buy-outs. Valuations have decreased significantly and, in slightly more austere times, inefficiencies and cost-saving measures are more obvious to identify.”

In October 2011, we provided a £35 million receivables finance line to part-fund the management buy-out of Encon Group from its parent company Wolesley. Encon is a leading distributor of insulation and fire protection products, dry lining, suspending ceilings and partitioning to all sectors of the construction industry with a turnover of £194 million.

By leveraging the value of Encon’s sales ledger, the asset-based finance facility from Lloyds Bank provided an important source of flexible financial headroom to support future growth. This form of asset-based finance is increasingly being used as part of the M&A and private equity funding mix as it strongly complements other types of debt in deal structures.

The buy-out model is also attracting private equity interest. Lloyds Bank has been involved in a number of deals where the equity is provided by private equity and the debt by the Bank. For example, in October 2011, it supported Bridgepoint Capital in its $84 million acquisition of Hampson Industries’ Aerospace Components & Structures, which is now known as Shimtech Industries. Shimtech is the global leader in the manufacturing and supply of shim solutions to the commercial and military aerospace markets. The company is now focused on expanding and developing its product range to meet the needs of the next generation of aircraft, as well as identifying opportunities to provide greater geographic flexibility to its global customer base.

Accessing finance for growth

With a significant downturn in M&A, how are companies financing growth? Well, there is certainly finance available to companies with the right business case. Lloyds Bank, for instance, committed £45.3 billion gross lending to UK businesses during 2011, including £12.5 billion to SMEs, higher than the Group’s share of the Government’s Merlin target. The Bank has continued to pledge to keep net lending positive during the course of 2012.

However, all businesses will have noticed the changes in the banking sector have resulted in changes to the way businesses deal with banks. It is therefore becoming increasingly important that manufacturers maintain an ongoing dialogue with their lenders, easing the path to liquidity when funds are needed. This return to the oldfashioned ‘relationship banking’ should be welcomed by lenders and companies alike.

We have supported numerous manufacturing clients with strong growth propositions. As well as asset-based acquisitions, we are seeing an increase in asset-based lending. A case in point is Esterform Packaging, one of the largest producers of plastic bottles in the UK with a turnover of £65 million. As the food sector increasingly turns to PET plastic bottle to help reduce CO2 emissions, Esterform looked to extend its existing site in Tenbury to meet the increased demand in this product line. Lloyds provided a £6 million asset-based lending facility, leveraged against the firm’s inventory, plant, machinery and property. The additional capacity means that Esterform is well positioned to take its share of the projected three to four percent growth in PET packaging market.

Another example of supporting a business for growth is Marelton Cross Ltd, a manufacturer of shower trays. To remain at the forefront of the evolving bathroom market, Marleton Cross used its current £3.5 million facility from Lloyds TSB Commercial Finance to develop, design and manufacture shower cubicles to complement its current range of products. The product line launched in 2012 and is expected to add £4 million to the company’s current turnover of £20 million within a year.

Supporting the Manufacturing Sector

As both the UK and global economy recovers from the global financial crisis, manufacturers in the UK are working harder than ever to find growth opportunities. But they are not alone. The health of manufacturing is of political as well as economic importance and the government has pledged to support growth where possible. Lloyds Bank is also keen to continue playing its part by supporting the many strong companies and management teams across this diverse sector.