FOR the past few months many chief executives have brushed aside fears of a downturn, saying that it if was coming, they hadn’t seen it yet. Not anymore.

Last week, a raft of profit warnings from Britain’s biggest nursing-home operator, a media group, housebuilders, retailers and car dealers, showed just how hard life has become.

The companies issuing the warnings are not alone. A large part of corporate Britain — particularly groups reliant on consumers — is now in the knacker’s yard. And it is the banks that will have to pick up the pieces. In many cases the equity value of these troubled retailers and nursing homes is now negligible compared with their debts.

The secondary-debt market gives the best insight into just how bad things are. Scores of private-equity owned firms, many of which were once quoted companies, are seeing their loans trading at 60% of their face value. Often the operating company is still fine, but the way the buyout was structured means it is laden with huge interest payments to service.

Banks will be forced to take debt-for- equity swaps or warrants to ensure these companies survive. So far they have been supportive, but as the numbers rise, many will go the wall.

As we saw last week when a proposed rescue of Taylor Wimpey, the housebuilder, collapsed, investors are going to take a harder look at proposals for restructuring. In the case of Taylor Wimpey, they will probably renegotiate the terms, but others will not be so lucky.

What we are seeing is the credit crunch moving into a new phase. Most of the big banks have written off their exposure to sub-prime, and now face a more traditional economic downturn.

Market madness

I DON’T want to appear like a cheerleader for the stricken banking sector. Last week, I said Barclays had the ability to take advantage of a generational opportunity to take on Wall Street, but the other startling oddity is Lloyds TSB.

Eric Daniels, its chief executive, must be exasperated at the treatment the bank’s share price is receiving on the stock market. One whiff of a potential acquisition in Germany, where Daniels is examining a number of opportunities, and the share price starts a downhill run. The share price now yields close to 12% and is trading on a profit-earnings multiple of just five times.

It’s a harebrained valuation. Lloyds has been one of the most conservative banks of the past five years. Its management is prudent, its earnings are of an infinitely higher quality than its peers and it knows its customers. Even in the higher-risk area of lending to small business, its strategy has been to ensure security over its loans ahead of squeezing higher loan margins.

The market appears spooked that Daniels is now recklessly looking at the Continent to find deals. It would be remiss if he didn’t as these are times of interesting opportunities. But to suggest that the Lloyds board is suddenly going to abandon the ethos it has spent years cultivating is patently absurd.

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