UK firms face largest ever increase in debt-driven costs
Companies are experiencing the largest hike in debt-related costs ever faced by the UK private sector, according to a study by management consultancy Baringa.
Baringa gathered data on UK corporate bonds and loans to see how much more money firms would be required to pay if their debt – which was mostly taken out before the end of 2021 while interest rates remained at historic lows – was refinanced at the interest rates now predicted for the time it falls due.
The consultancy discovered that in 2024 UK firms would pay a combined £5.9bn extra to service their debt, a figure which will peak at £7.2bn in 2026, falling to £2.4bn by 2030.
The problem is caused by the amount of debt in the corporate system combined with the pace of change in interest rates after a long period at ultra-low levels.
Baringa estimates that higher interest rates will cost British businesses an additional £4.7bn a year for the rest of the decade, with much of that cost being pushed onto consumers.
The issue is exacerbated by many firms lacking the institutional memory to deal with this interest rate environment: just 27 per cent of senior financial executives in large UK companies were involved in decision-making before 2008 when interest rates were last this high.
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Baringa also surveyed 250 chief financial officers, treasurers and financial directors in large UK companies. Nearly all (96 per cent) reported facing or expecting to face an increase in the cost of refinancing. Almost three quarters (72 per cent) said the increase will be “significant”.
Two-fifths (39 per cent) responded that despite having some liquidity and cash reserves at present, the coming crisis means they might “struggle to survive”.
Three quarters (74 per cent) of senior financial executives said their products and services will become more expensive.
The most popular solutions to the problem were to sell assets (22 per cent of respondents), draw down their cash reserves (22 per cent), sell parts of their business (21 per cent) and make redundancies (21 per cent).
“It’s tempting to look at plateauing or falling interest rates and conclude we’re coming out of the woods,” said Baringa partner Nick Forrest. “Sadly, this disguises the truth that the hike in rates since the end of 2021 condemns business and the wider economy a huge hangover for years to come. In absolute pound terms the UK faces the largest single hike in interest rate-driven debt servicing costs it has ever faced.”
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Commenting on the individuals tasked with tackling higher interest costs, Forrest said, “They face the challenge of adapting to a new macroeconomic backdrop: the tools and techniques which got them through the last 10 years are not the tools and techniques needed for the next 10 months.”
When asked about the magnitude of the issue, a third of senior financial executives said it was “on par with the worst crises” they have faced in their career. A fifth (20 per cent) said “this is not a crisis – it’s completely manageable.”
Forrest urged business to respond with macroeconomic forecasting; developing a financial plan; and developing a business plan.
“The former requires setting out scenarios and stress testing different interest rate paths,” he said. “The second is required to ensure liquidity as well as managing financial risk through utilising a sensible breadth of financial instruments and maturities. The latter must focus on business decisions required to navigate the choppy waters ahead, while integrating with the financial plan.”
He said the most positive outcomes would involve refinancing onto a more resilient basis, but that some businesses may become unviable, creating “a wave of defaults”.
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