Rising residual values pose threat to plant owning firms

A pick-up in residual values as the recession eases could prompt a spate of insolvencies among plant owning companies, according to Niall Wordsworth, managing director of site dumper manufacturer Barford.

"With residual values so low, the banks will be looking at their lending to plant companies and calculating that selling the machine at auctions would realise so little that it's better to keep the firm afloat and collect what interest payments they can - even if the firm's overall debt is rising. When residuals improve, they may decide it is time to withdraw the funding knowing that the fleet can be sold to repay the debt," he explained.

Usually banks are criticised for withdrawing funding at the beginning of a recession, but Wordsworth said they were too preoccupied with their own problems to develop sector related plans for companies owing them money. And now banks find their plant-owning customers are worth more as a trading company than as lots in an auction: "But for some plant owners that situation could reverse once residual values start to rise," he warned.

He is also concerned that banks may seek to get plant companies covered by the government guarantee scheme, which means they could then withdraw funding knowing that their losses would be limited to 10%.

His advice is for plant owners to sort out long-term funding now, possibly from specialist lenders, and to separate the day-to-day banking and working capital from the equipment loans. "Specialist lenders are under different pressures than the banks which need to build up their funds or repay the government," he said.

"This recession still has a long way to run and there are a lot of twists and turns on the road to recovery. Don't assume your funders attitude will remain consistent," said Wordsworth.