Borrowing from UK publicly listed companies (UK plc) increased for the eighth consecutive year in 2018/19, according to the most recent results from Link Group UK’s Debt Monitor.
This has contributed to record debt levels, with the report revealing that net debt (total borrowing minus cash) increased by 5.8 percent to a new record of £448.2 billion, while total debts (which exclude cash and equivalents) also increased by 6.7 percent, reaching a £638.3 billion record.
Concerns for companies
The Debt Monitor gathers balance sheet data from FactSet on 310 companies listed on the main market in London, utilising results and figures dating back to 2007/8 and excluding both companies without a full history and companies in financial sectors such as banks, insurers, and asset managers.
It revealed that healthcare and utilities companies saw the largest increases in debt, with only oil, telecoms and mining enjoying lower debts year-on-year.
Meanwhile the top 100 companies saw debts rise faster than mid-caps, although the increase in net debt was softened by rapidly growing cash balances, which were boosted by one eighth. This reflected an 8.9 percent across UK plc’s nationwide to £195.1 billion.
Outside the top 100, total debts were almost unchanged from the last Debt Monitor, as operating profits have continued to fall year-on-year. As a result, this group of UK plc’s ran through 6.8 percent of its cash, resulting in a rise in debts. Approximately 40 percent of companies analysed in the study increased their borrowing totals, becoming more prone to this behaviour due to the pressures of slowing demand.
Can record levels of debt remain manageable?
Although the value of UK plc’s debts is now creating yearly records, Link Group’s findings suggests that the measures of debt burden and debt sustainability are not showing signs of strain.
Interesting, the Debt Monitor’s data reveals the core debt/equity, liabilities/assets, and short-term/long-term debt ratios have all improved slightly year-on-year.
Meanwhile, even if interest payments rose slightly as a percentage of operating profits due to the lack of profit growth, such payments remained below the average for the last decade courtesy of the current low cost of finance.
The value of debt compared to operating profit has risen to 2.6x which the third highest reading since the 2008/9 year but remains well below 4x, a threshold where companies typically begin facing difficulties repaying any called debts.
The figures also fail to reveal any big outliers that distort the market, as the majority of companies followed the trend for each of these measures. Link Group perceive the rise in borrowing levels from last year’s total to be relatively modest, when adjusting for the impact of transactions such as GlaxoSmithKline’s debt-financed buyout of a joint venture with Novartis. Furthermore, mid-cap and smaller companies are more reliant on the slowing and uncertain UK economy, consequently showing greater caution than their larger counterparts.
Forecasting for the future
Michael Kempe, chief operating officer of Link Market Services argued that the borrowing figures failed to tell the whole story, suggesting that the emphasis needed to be put on the burden of debt.
He said: “Borrowing will always rise over the long term because debt is almost always a cheaper means of raising capital for investment than equity. As companies grow, their capacity to take on new loans to finance their expansion increases. So, only considering UK plc’s debt pile in isolation doesn’t tell the whole story. It’s really important to consider the burden of debt, and how sustainable it is as well. This is why the increase in borrowing in 2018/19 isn’t a cause for concern. It’s well backed by assets, and easily serviced at present by the profit companies are making. There are of course companies and sectors under strain, but the overall picture is reasonably comfortable.
Commenting on the future business behaviour of UK plc, he added: “Over the next year we expect companies to maintain a cautious stance as long as uncertainties abound in the UK, and while the risks to the global economy rise. The trajectory of interest rates should provide some comfort, however, as central banks have sounded increasingly dovish of late.”
Damian Watkin, director at D.F. King, part of Link Group believed that the rise in popularity of high yield bonds over short-term loans could was a continent-wide phenomenon, and noted that the fruitfulness of the situation was dependent on low interest rates.
He said: “This position may be manageable in the current low interest-rate environment, in which investors are still searching for yield and issuers are able to roll over maturities financed with new issues. Should rising interest rates close the high-yield market to lower quality borrowers, however, a significant rise in debt restructurings and defaults would be on the cards among highly indebted companies.”
He concluded: “Historically, refinancing has been easier with a small number of lending banks, rather than large number of often unknown bondholders. Companies can take action ahead of time, and ahead of any interest rate rises, on upcoming maturities through liability management exercises, for example, repaying bonds early with cash, or with money raised via a new bond.”
