Bank of England sounds alarm over corporate debt as private equity predators fall on UK companies
Bank of England Governor Andrew Bailey has sounded the alarm over skyrocketing levels of corporate borrowing and warned that highly indebted companies may have a hard time surviving the year.
When the central bank released its latest financial stability report, it said that indebted companies are “much less resilient.”
The warning came amid a spate of takeovers of UK companies by private equity firms known for piling extra debt – or leverage – onto companies to lower the tax burden and boost profits.
Bank of England governor Andrew Bailey (pictured) warned that indebted companies are ‘much less resilient’ and risk going under if another crisis hit
A range of companies has been targeted, including supermarkets Asda and Morrisons and security giant G4S.
Responding to accusations of ‘pandemic looting’ and fears that private equity deals could weaken the UK economy, Bailey said: ‘We have no vision of private equity per se.
“What I would say, however, and I hope and think Covid has powerfully illustrated this, is that it really is about the issue of corporate leverage.
“Companies that increase their leverage beyond levels that are safe and sustainable are in a much less resilient position when a shock comes – and we’ve had a really big one.
‘The very clear message has to be for companies: leverage is important. It is important for the resilience of your own financial position. That’s why you have to take it into account.’
Crackdown on cloud
Technology companies providing cloud services to the UK financial sector could find themselves in the spotlight of the Bank of England.
Companies like Amazon Web Services support increasingly important parts of the business, the Bank says, and it wants to increase control of cloud providers as the small pool of tech companies can negotiate terms.
Bailey said, “That concentrated strength can manifest itself in secrecy, opacity and failure to provide customers with the information they need to monitor risk in the service. We’ve seen some of that happen.’
The Bank said businesses could come under pressure as early as the fall, when government support begins to decline during the pandemic.
The Threadneedle Street report said VAT deferred refunds, piled up rent bills and massive Covid loans would put ‘additional pressure’ on cash flow and could increase bankruptcies.
Bailey noted that the debt burden had increased only “modestly” since the start of the pandemic.
But he said this masked troubling levels of lending in struggling sectors such as hospitality and travel.
Private equity bidders are circling UK companies to take advantage of low share prices in a stock market under pressure from Covid.
Ministers are under increasing pressure to investigate the wave of deals. Nick Hood, senior advisor at Opus Restructuring, said: ‘There has to be an investigation, there has to be a stubborn analysis of what has happened so far. It is up to the government to find a mechanism to prevent these companies from going into debt.”
Bailey has urged banks to continue lending and cooperating with repayments as the recovery continued.
He said: ‘Covid has had an uneven effect on different sectors of the economy, so it’s important that support stays in place.’
Officials have kept the level of cash buffers, which lenders must maintain in good times to absorb losses when the economy sours, at 0 percent until 2022.
This means lenders can borrow an additional £190 billion to support the economy. Bailey downplayed the risks that the housing boom would lead to unsustainable debt among borrowers.
Bank lifts pandemic dividend ban
Lenders will finally be free to set their own dividends again after the Bank of England lifts restrictions on payouts.
Britain’s banks were slapped with a ban on dividends when the pandemic hit, as officials feared lenders would need all possible firepower to support the economy.
But Governor Andrew Bailey is confident the sector is strong enough to cope.
He said: ‘This was the first major test of post-financial crisis reforms, particularly for bank resilience, and the results so far have been encouraging.
UK banking has the capacity to continue to provide households and businesses with the support they need.”