Outlook: Is Energis as bad as it gets, or is worse to come?

Britain's new economy bust has been on a long fuse. It started with the dot.coms – famously described by IBM's Lou Gerstner as like fire flies before the storm – swept slowly out through the telecommunications, media and wholesale financial services industries, and is now coming home to roost in a series of high-profile insolvencies. The big question: is this as bad as it gets, or is there worse to come?

For the technology and telecoms sectors at least, the answer is more likely to be the latter. We may be near the bottom, but a number of things have yet to occur before we finally hit bedrock. This column mistakenly attempted to call the bottom of the technology sell-off as early as December 2000, by which time many stocks had already declined precipitously. At the time, it seemed impossible that they could still halve and halve again, but many of them have.

The mistake we and many others made was in failing to take proper account of the effect of reverse leverage on equity valuations. In the upturn, debt leverage works to the advantage of equity holders, since any perceived increase in the value of the company all goes into the equity. As the debt is paid down, the equity becomes worth more and more. In a downturn it works in reverse. As investors come to appreciate that it will take longer to pay off the debt than thought, the company's perceived value falls. Once that value sinks below the size of the debt, then the equity ceases to be worth anything at all. In essence, this is what has happened to Energis. At the peak, the equity was worth an astonishing £14bn. This always did look like cloud cuckoo land but that the equity might be worth at least the £1bn it was floated for seemed plausible with the company apparently cash positive and generating £800m a year of revenues.

Two things have happened to change that view. The first is that when it comes to new entrant telecoms companies, no one trusts the revenue and profit figures any more. The accounting excesses of Global Crossing and others have cast a pall over the entire industry. No one is above suspicion. The second is that Energis left itself no room for manoeuvre when it renegotiated its borrowings last December. It only required a small short-fall in forecast revenues for the group to be unable to honour its debts.

That the shares are still worth anything at all in the stock market is only down to the vague hope that bondholders might be persuaded into a debt for equity swap that could make the business viable again, or that a brave venture capitalist might somehow or other be able to make the numbers work by buying out the bonds for a fraction of their redemption value.

Well, anything is possible, but what this industry really needs is for a big player such as Energis to roll over and die. This is perhaps the most important reason for believing that the bottom of the technology bust hasn't yet been reached. Few competitors are interested in buying Energis's assets as such, since virtually everyone has already got far more capacity than they can find customers for. But they are very much interested in Energis's customers minus its capacity. Removing Energis from the market place, might, just might, provide the platform from which the industry can rebuild.

In most previous recessions, this is precisely what has occurred. In the downturn, excess capacity is removed from the equation allowing the survivors to regain pricing power and start moving forward again. As far as bandwidth is concerned, that's yet to happen on a significant scale this time around. There are some interesting reasons for that. In part it's low interest rates, which makes excessive debt more affordable than it's been in previous recessions. It's also because banks have become better at spreading their lending risk, through securitisation and syndication. In combination these factors have made banks more prepared to keep insolvent companies alive on life support than they perhaps were.

Whether that's entirely a good thing is a moot point. Not allowing companies to go bust may make the downturn less painful, but by interfering with the purging power of markets it may also make the pain more prolonged. As to whether the technology and telecoms bust will ripple out into the wider economy, that's a tougher question to answer. Business confidence is low across the spectrum, but the consumer keeps spending and, even if jobs in the private sector are taking a beating, they are being created like topsy in the public sector. Sir Edward George, the Governor of the Bank of England, is confident the economy will be recovering by the second half. Don't count on it.

Savings gap

Now look here. You lot out there are not saving enough. You should be putting away at least £27bn a year more than you are. Once the fact that final salary pension schemes are being scrapped right, left and centre is taken into account, maybe that should be £33bn. This is a summary of comments from the Association of British Insurers yesterday on announcing new business figures for last year up 4 per cent at £55bn.

There is nothing quite so insincere as the life assurance industry urging us all to go out and save, save, save, and yet, following a week of near hysteria in the press over Britain's growing savings gap, the ABI senses an unprecedented selling opportunity. It is often said that life assurance and pensions are never bought, they are sold, and after two years of bad news the ABI reckons it is time to go out and sell once more.

That the figures improved at all last year is little thanks to the Government, the other organisation which persistently tells us to save more than we do, so as not to be a burden on the state in the twilight of our years. The stakeholder pension, Labour's big new idea for pensions when it was elected in 1997, was introduced last year to little fanfare, and although quite a number of these policies have been sold, few have gone to the people they were originally intended for, the low paid. It has taken Frank Field, the Labour MP whose idea stakeholder originally was, to point out that this is perhaps just as well, since to save for retirement if you are below a certain income level is merely to deprive yourself of means-tested state pension and other benefits later in life. The Government could have had another pensions mis-selling scandal on its hands, and there would have been no one to blame this time around other than itself.

The Government wants to encourage people to save, but its savings policies are in the most terrible mess. On the one hand it launches stakeholder, on the other it removes the pension industry's tax break on dividends, which is one of the chief reasons for the shortfalls occurring in pension funds. The industry has become so overloaded with regulation and reviews that it has begun seriously to wonder whether the UK is worth the candle. Some leading players are already reallocating capital to the Continent, where margins are better and regulation is lower.

Meanwhile, the industry's most popular product, with-profits savings, is under attack from the centre as never before. There are at least four government-sponsored reviews with a bearing on the with-profits sector going on, and all of them promise to think the unthinkable. Whatever happened to the idea that the market should decide what it wants and doesn't want? While the Government meddles, the savings gap gets wider. There a lot wrong with the life assurance industry, but the Government scarcely helps.

j.warner@independent.co.uk