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Private equity faces growing pressure over guarantees to portfolio companies, says Eversheds

As the recession casts doubt over the viability of some UK businesses, a growing number of company directors are seeking legal advice from City lawyers on their accountability for the ‘goi

As the recession casts doubt over the viability of some UK businesses, a growing number of company directors are seeking legal advice from City lawyers on their accountability for the ‘going concern’ judgment in annual reports.

‘Before signing off publicly traded companies’ accounts, auditors are looking at seeking comfort from banks on how committed facilities are before giving a going concern opinion,’ says Robin Johnson (photo), a partner at international law firm Eversheds.

‘This is forcing banks and companies to renew or renegotiate facilities at an earlier stage than they might otherwise have done, prompting some lenders to force through further security arrangements, cross-guarantees and improved and tighter covenants.’

The issue is even more pressing for private equity firms. ‘In the private equity market the pressure is more acute as auditors are seeking guarantees from the private equity funds which control businesses that they will back their portfolio companies,’ Johnson says.

‘This is forcing private equity houses to make decisions on which portfolio companies they will back. This leads again to discussions with lenders, which may have a highly leveraged exposure in private equity situations.

‘Directors, particularly non-executives, are right to be concerned about exposure, and consequentially audit committee meetings are becoming full-scale financing and strategy review sessions.

‘Increasingly, non-executives are requiring a report from the executives on risks associated with suppliers, customers and the consequences of these risks on the business, particularly as the credit insurance industry shrinks.’

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