Top firms’ debt has DOUBLED to £406bn
As turmoil rocks markets ten years after crash we reveal...
BRITAIN’S biggest companies are sitting on a debt ‘timebomb’ of £406billion – almost double the amount held in the run-up to the financial crisis a decade ago.
Analysis by The Mail on Sunday found debt at companies in the FTSE 100 index of Britain’s leading firms, which stood at £236.4billion in 2008, has risen to extraordinary levels thanks to years of easy credit and low interest rates.
City experts warned that the debt binge could come back to haunt firms after stock markets around the world tumbled last week amid concerns that rising US interest rates will drive up the cost of borrowing and potentially trigger a wave of defaults.
The sell-off came as the International Monetary Fund sounded the alarm about the strength of the global economy and rising debt.
Critics said firms in the UK were borrowing vast sums to fuel bumper dividend payouts and takeover deals – rather than using the money to prepare for a potential downturn.
In a stark warning, credit rating agency Moody’s warned that weaker firms should be ‘saving for the rainy days ahead’ rather than spending money on dividends.
This newspaper revealed last month that dividend payments by Footsie companies are set to hit a record £89 billion this year – double the amount handed out to shareholders ten years ago.
‘The higher proportion of vulnerable [indebted] companies is sowing the seeds for a spike in the default rate when the next credit downturn strikes,’ said William Coley, senior vice-president at Moody’s.
He said even if the next downturn is milder than it was in 2009, more companies would go to the wall than they did in the financial crisis.
Coley added that the number of companies going bust across Europe was already higher than at the peak of the financial crisis – even though credit conditions are far more benign now.
City veteran David Buik called it a ‘timebomb’ that is unsustainable. He said: ‘The level of debt is just ludicrous. We were supposed to get this sorted as a result of the financial crisis.’
Some market watchers have pointed the finger at debt rating agencies for giving firms too much leeway when assessing their financial health.
Alasdair Ross, head of investment grade credit for Europe, the Middle East and Africa at asset management giant Columbia Threadneedle, said: ‘Ratings agencies are giving quite a lot of benefit of the doubt to companies making large acquisitions.’
A report last week by financial news giant Bloomberg claimed that out of the 50 biggest takeover deals in the past five years that were mostly financed by debt, more than half of the acquiring companies were allowed to keep investmentgrade credit ratings – even though they had reached levels of borrowing similar to firms rated as ‘junk’. Yesterday marked the tenth anniversary of Royal Bank of Scotland, HBOS and Lloyds TSB receiving £37billion in Government bailouts.
Over the past year, stock markets have been buoyant, hitting record highs despite the threat of a trade war between the US and China and potential turmoil as Britain prepares to leave the EU. However, the Footsie fell 4.4per cent last week, sparking fears that a stock market bubble was bursting ahead of another downturn.
The figures for net debt for FTSE100 companies exclude financial services firms such as banks, which treat debt differently on their balance sheets.
According to the latest annual reports, the firms sitting on the largest debt piles are oil behemoth Shell, which has £50.4 billion of net debt after buying BG Group in 2016. British American Tobacco bought US cigarette rival Reynolds last year and its net debt now stands at £45.6 billion.