By Tom Freke
LONDON, Jan 16 (Reuters) - An unpaid utility bill can break a healthy business as the downturn deepens, keeping many executives busy with mundane bookkeeping chores this year rather than making grand plans for the future.
British Sofa-seller Land of Leather, which had no debt on its balance sheet, filed for administration this week, unable to pay its bills, hit by slumping sales and unwillingness from bankers to provide new capital.
Homebuilders, building material firms and pub groups have all recently declared they will focus on cash and capital requirements, as these sectors have been hit by the downturn and many firms are heavily burdened by debt.
"If an invoice comes in and there is not enough cash to pay it, and banks are not willing to extend credit any further, then this leaves the company in a difficult situation," said Gareth Davies, a restructuring banker at Close Brothers.
"They should know exactly when bills need to be paid and when invoices are likely to come in. Most companies are unused to micro-managing cash on such a basis," he said.
Only if companies react in a timely enough fashion to an expected financing gap, will they be able to strike a deal and get more credit from their banks -- but that requires rigid day-to-day cash management from the top down.
"The first thing many advisers will do when asked to help a company is to see if all the invoices are chased up," said David Lacey, an insolvency expert at law firm Stephenson Harwood.
"There is no point sales people continuing trying to sell to a company that is not paying its bills," he said.
On Thursday, Germany's Continental AG said it had agreed new terms with its lenders in exchange for interest rates 1.35 to 2 percentage points higher than previously.
THROUGH A GLASS DARKLY
Rating agency Moody's expects default rates amongst companies to rise sharply in 2009 as the economy weakens and the cost of liquidity rises.
The default rate amongst European speculative grade companies -- those with the highest chance of going belly-up -- is likely to reach 18 percent by the end of the year, the agency said this week, up from just 2 percent in 2008.
Debt-laden pub operator Punch Taverns said this week increasing cash flow was its main priority this year. It cancelled its final dividend for 2008, cut capital expenditure and plans to sell off some of its pubs.
And even very large companies such as Dutch-based petrochemicals firm LyondellBasell, the biggest corporate bankruptcy of recent times, can find themselves in trouble over a relatively small cash shortages.
The company, whose balance sheet was heavily loaded with debt after a leveraged buyout in 2007, found itself in trouble as earnings slumped and the falling price of oil and other commodities prompted an unexpected cash call.
The drop in the price of oil at the end of 2008 slashed the size of a collateral-backed loan meaning the company needed to find an additional $1.2 billion in the fourth quarter of 2008, and a further $900 million in January 2009.
Unable to meet these demands, LyondellBasell appointed restructuring advisers and shortly afterwards filed for Chapter 11 protection for its U.S. businesses.
And it won't have been the last major bankruptcy this year, restructuring analysts say.
"In the absence of debt capacity ... we will see a wave of distressed balance sheet restructuring," law firm Freshfields said in a note this week.
(Editing by Douwe Miedema and Chris Wickham)