Has Merlin Worked for Manchester?

Date: 16/02/12

Project Merlin, the initiative to boost bank lending to businesses, celebrated its first birthday last week. Despite some criticism, it remains a flagship economic policy in helping to stimulate regional growth and boost transactional demand. In this article, Alasdair Mackinnon at business law firm, DWF, considers how successful Merlin has been in Manchester, and assesses the wider lending environment in the region.

A Magic Touch to Boost Lending

In February 2011, the four major UK banks made a commitment to make £190bn credit available to businesses in 2011, with £76bn earmarked specifically for small business lending. With the availability of credit declining, the aim was to encourage bank lending in order to help drive up demand and to avoid viable businesses from going under due to unnecessary cash flow problems.

However, a year has passed and there continues to be much debate as to its success. While the Government has put banks under increased pressure to lend to businesses, those banks have faced various constraints to lending.

A risk averse financial environment, accompanied by a realisation that unsustainable borrowing was a core cause of this prolonged downturn, has meant that there was always going to be a reluctance within banks for them to lend more freely. The major high-street banks are facing up to the realities of more stringent capital adequacy requirements and tougher internal risk assessment regimes. On top of this, many of the business customers which Merlin has been designed to help are nervous about the future and reluctant to take on more borrowing onto their balance sheets.

This has led to a situation where the main beneficiaries of Merlin-based business lending have been investment grade borrowers and existing bank customers. In general, smaller firms with little borrowing history - especially in sectors such as real estate development – are continuing to be left out in the cold when it comes to securing bank loans. This is disappointing, as an aim of Merlin was to boost the confidence and ambitions of smaller businesses.

The uncertainty of the scale of Merlin’s achievements is such that, on its anniversary, there is much political debate about whether the banks actually met the £190bn target at all.

What we need from Merlin

There remains a strong case to encourage more lending in Manchester, as it could still do much to restore business confidence in the city. However, lending needs to be refocused on the smaller businesses that the policy was originally intended to help. 

Merlin needs to support the broader regional economic base, rather than merely just freeing up funds for large businesses alone, if it is deemed to be a success. For this to happen, banks will need to provide their credit functions with a more freedom and flexibility, to open the loan market up to a wider range of businesses. 

Confidence in the market could also be strengthened by encouraging greater predictability in the approach of banks to lending proposals. Currently, there is a high level of inconsistency between the lending decisions of the various banks and, on occasions, even within the same institutions. Whilst there is an element of inevitability about this, it would be a step towards improving the credibility of banks if consistency could be improved.

Look for Alternatives

For those requiring funding but finding it hard to secure bank debt, there are alternatives. Asset based lending has become increasingly popular over the last few years and we see no reason why this popularity will decrease, especially for those business with significant contracted revenue.

Various private equity and regional investments funds have become increasingly active, although private equity has traditionally struggled to make the necessary returns in the SME space and not everyone is keen on having an equity investor on board.

For certain businesses, there may be benefit in looking at the opportunities the capital markets provide. These will certainly not be for everyone and come with a high cost and regulatory burden but at the same time should not be dismissed out of hand.

A newer development and perhaps less prevalent is certain banks deciding to establish their own mezzanine funds that are to act as mezzanine lenders rather than providing additional (more expensive) funding to existing customers.

This article orginally featured in Greater Manchester Business Week authored by Associate Alasdair Mackinnon