Bernard Ginns: Forgemasters' loan refusal a short-sighted political decision

Regular readers of this column will know all about the company's bid to become a world leader in the supply of components for the next generation of nuclear power stations and the positive ripple effect this would have on the manufacturing industry in South Yorkshire and beyond.

The management, led by chief executive Graham Honeyman and chairman Tony Pedder, spent two years putting together the programme to fund the 140m project to install a new 15,000 tonne press.

Central to the bid was the 80m so-called soft loan. They had support from Westinghouse, the US nuclear reactor provider, in the form of forward orders worth 40m. They had support from banks and interest from private equity to make up the 20m remainder.

Then came the coalition scythe to cut off the loan in the name of fiscal austerity but amid murmurs that Liberal Democract ideological opposition to nuclear power was a factor in the decision.

Energy Secretary Chris Huhne told the Yorkshire Post: "This had absolutely nothing to do with our nuclear policy whatsoever. It has to do with the constraints that this government is under. This particular deal seemed to me to be a very strong commercial deal and I don't see any reason why it should not be able to be financed from the financial markets. I believe that company can go ahead with that project if it's prepared to talk to people in the City."

I spoke to Dr Honeyman following the unwelcome announcement on Thursday. I asked him why the company couldn't fund the deal using private equity and bank debt alone.

"Private equity would take away the whole of the shareholding away from Forgemasters and put it in the hands of someone else."

He added: "Bank interest rates are very high therefore we would have to make huge profits every year in order to just pay off interest on the debt."

As I understand it, the government loan was to be repaid with interest over 15 years. The interest was low and was to be rolled up for a number of years so there was no servicing cost until the press was up and running in two to three years' time.

The cost of the project was 140m, which is considerably more than the current turnover of 125m. Company forecasts suggest the new press would more than double the size of the business.

This gives you an ideal of the scale and why going down the private equity route would probably require the business to be sold and I can't see Dr Honeyman agreeing to such a move at the moment.

I know there have been calls for banks to step in and rescue the deal. On the face of it, it could provide an opportunity for much-maligned lenders to put their money where their mouth is and ride to the rescue of an iconic South Yorkshire company. A public relations bonanza, in other words.

But how would this been seen by the banks' dispassionate lending committees? Bank debt is secured against existing assets or against cash flow and profit.

In this case, existing assets wouldn't cover the loan and there would be no cash flow to come from the press for two to three years. So the loan would be unsecured.

A wider issue facing commercial lenders is the nature of the end market, which is ultimately created by the government. Most of Britain's nuclear power stations will have been decommissioned by 2023 and yet there is uncertainty over current coalition thinking on how these are going to be replaced.

With government playing a key role in the market, it made good sense for Forgemasters to go to government for the loan. Commercial lenders – and I assume the company explored these avenues before settling on the government route – might not have the appetite for such risk. As one corporate finance adviser said to me at the end of last week: "Doing this deal on a conventional basis is a non-starter."

Ministers should know this and they should taken these special circumstances into account. Instead they have dealt a blow to manufacturing in its heartland.

This programme was to have been a catalyst, a prime mover, which would have had manifest benefits for supply chain companies in South Yorkshire's burgeoning nuclear industry.

Everyone in Yorkshire was for it because it made perfect sense. In many years of reporting on current affairs, I struggle to recall a more short-sighted political decision.