Bank of England sounds the alarm on corporate debt burden as private equity predators attack UK businesses
Bank of England Governor Andrew Bailey has sounded the alarm over high levels of corporate borrowing and warned that heavily indebted companies could struggle to survive the year.
As the central bank released its latest financial stability report, he said companies with debt were “much less resilient.”
The warning came amid a wave of UK business buyouts by well-known private equity firms to accumulate additional debt – or leverage – on companies to lower the tax bill and increase profits.
Bank of England Gov. Andrew Bailey (pictured) has warned that debt-laden companies are ‘much less resilient’ and at risk of collapsing if another crisis hits
A range of companies have been targeted, including supermarkets Asda and Morrisons and security giant G4S.
Responding to accusations of ‘pandemic looting’ and fears that private equity deals could make the UK economy weaker, Bailey said: ‘We are not taking a position on private equity per se.
“What I would say though, and I hope and think Covid has exemplified this forcefully, is that it really comes down to the issue of corporate leverage.
“Companies that increase their leverage beyond safe and sustainable levels are in a much less resilient position when a shock hits – and we’ve had a really big one.
“The very clear message must be sent to companies: the leverage effect is important. It is important for the resilience of your own financial situation. Therefore, you have to take this into account.
Tech companies providing cloud services to the UK financial sector could be in the spotlight of the Bank of England.
Companies like Amazon Web Services are taking over increasingly important parts of operations, the bank says, and it wants to increase scrutiny of cloud providers as the small group of tech companies can haggle over the terms.
Bailey said, “This concentrated power can manifest itself in secrecy, opacity and not providing customers with the information they need to be able to monitor risk in the department. We have seen this happen.
The bank said businesses could be squeezed as early as the fall, when government support during the pandemic begins to wane.
The Threadneedle Street report said deferred VAT refunds, accumulated rent bills and large Covid loans would put “extra pressure” on cash flow and could lead to increased insolvencies.
Bailey noted that debt levels have only increased “modestly” since the start of the pandemic.
But he said it was masking worrying lending levels in struggling sectors such as hospitality and travel.
Private equity bidders are circling UK firms to exploit low stock prices in a stock market depressed by Covid.
Ministers are under increasing pressure to probe the upsurge in agreements. Nick Hood, senior advisor at Opus Restructuring, said: “There has to be an investigation, there has to be a thorough analysis of what has happened so far. It is up to the government to find a mechanism to avoid it. that these companies do not go into debt.
Bailey urged banks to continue to lend and cooperate with repayments as the recovery continued.
He said: “Covid has had an uneven effect on different sectors of the economy, so it is important that support remains in place.”
The authorities have kept the level of cash reserves, which lenders must hold in time to absorb losses when the economy turns sour, at 0% until 2022.
This means lenders have an additional £ 190bn to lend to support the economy. Bailey downplayed the risks of the housing boom fueling unsustainable borrower debt.
Bank lifts ban on dividends in the event of a pandemic
Lenders will finally be free to set their own dividends again after the Bank of England lifts payment restrictions.
British banks were hit with a dividend ban when the pandemic hit, as officials feared lenders would need all the firepower they could to prop up the economy.
But Gov. Andrew Bailey is confident the industry is strong enough to cope.
He said: “This has been the first big test of post-financial crisis reforms, especially for the resilience of banks, and so far the results have been encouraging.
The UK bank has the capacity to continue providing the support that households and businesses need.