Debt finance more attractive than equity
The firm’s research shows that total borrowings, excluding cash holdings, has reached £556.4 billion. Net debt has risen 69% since its low in 2010-2011, a climb of £159.6 billion. It had fallen by a fifth from the start of the financial crisis in 2008-2009. Debt is a good source of finance compared to the cost of equity with interest rates so low, Fish says.
With a rise in UK interest rates to 0.75% in August rated an 80% likelihood by the market, the level and nature of indebtedness is of concern to investors. According to LAS, interest rates take out £1 in every £8 of operating profits.
Corporates looking for a longer fix
Just 18% of borrowing is now short-term, from 26% in 2008-2009. Gearing (debt relative to equity) has also eased from 89% in 2008-2009, settling at 73%. Fewer companies are adding debt so net debt levels may have peaked, the research says.
Fish says that corporates are taking a more cautious view of the future, looking to fix for longer, locking into historically low interest rates, and giving them certainty over the financing of projects.
Affordability is the key
Eight companies account for half of the UK’s public limited companies (PLC) net debts, with BAT the most indebted. Oil majors Shell and BP’s debt’s climbed 459% since the financial crisis. Businesses with long-term stable predictable revenues or asset bases are better able to service high debt levels, Fish notes. Shell used borrowing to maintain a predictable income stream for shareholders while oil prices were low.
As to whether this record level of debt is a concern, Fish says the key thing is its affordability, not its level.