Company debt: a big problem in the coming year

By Associate Editor David Stevenson Jan 05, 2009

David Stevenson
HBOS business banking

There won't be enough money for everyone...

As many of us are becoming all too aware, as we move into the New Year, a distinct lack of hard cash looks like a growing problem.

But it's not just consumers who are likely to become increasingly cash-starved in 2009. Plenty of companies will feel the pinch too, as sales and profits are ever more squeezed by the recession.

That makes the need to find extra money from somewhere all the greater. And for many firms, that could be the next massive worry.

Britain's businesses have already been running short on cash for several months. One of the Bank of England's money supply gauges which tracks how much money is held by "private non-financial corporations" – firms that make or sell things – has been indicating trouble building up since last March.

And the latest figures, smuggled out in the New Year fug and so virtually unnoticed by the media, were truly shocking. UK companies' cash deposits have now dropped to their lowest levels since the early 1980s after an unprecedented 6% fall over the year to November.

In other words, corporate cash flow is seriously under the cosh. So what UK businesses clearly don't need right now is another funding headache on the horizon.

Yet with this being "the biggest credit crunch in global history" as The Times' Jenny Davey puts it, that's exactly what's looming. "Corporate Britain is facing a refinancing time-bomb this year as more than £50bn of bank debt expires", she says. "The soaring cost of capital and the paucity of available debt financing will squeeze even blue-chip companies which need to renew or restructure existing loan facilities".

Even by today's standards, the numbers are huge. As much as £140bn of debt will need refinancing between now and 2011, says the ratings agency Standard & Poor's. And The Sunday Telegraph's numbers compiled by Dealogic are even scarier, showing that British businesses have £25bn of debt maturing in the form of corporate bonds this year as well as a "staggering" £85bn of loans.

In other words, firms who have racked up billions worth of cheap debt are about to see the lenders demand their cash back. But this time, borrowing will be a completely different ball game. 

"Refinancing will be a fundamental issue for everyone", says Simon Collins at KPMG. "Even for the very best companies it's difficult to refinance now – even at penal rates". As Gareth Davies at Close Brothers puts it: "there's no new money available. In the past it was the borrower who dictated the terms of a refinancing; now the tables have turned". David Brooks at Grant Thornton agrees: "lenders who've been told off for being too cavalier are being cautious about who they are going to lend to and how they are going to price it. It's going to be very tough and will get worse before it gets better".

What does this mean for the stock market?

Goldman Sachs recently estimated that half of the companies it covers will have to cut capital spending, and 60% will need to hold dividends flat to keep debt levels under control. "There are very few sectors that won't face refinancing issues this year," says Sam Dean at Deutsche Bank. "The difference in outcomes will be extreme, with losers facing real difficulties - and some won't survive".

No surprise then that indices of corporate credit default swaps (CDS) – which provide market insurance against the chance of bond defaults – have scarcely recovered despite the New Year share rallies.

So, despite all the 2009 stock market recovery talk, investors need to be very careful. Companies with strong balance sheets will be able to collect the lion's share of the finite cash available – even though they may not need it. But firms under intense funding pressure could find the money they desperately need "has already been mopped up by their rivals even before they get out their begging bowls", says the Telegraph. "Debt fears will play an even greater role in the stock market this year than 2008".

And, as we are increasingly seeing on the high street, for firms that run out of cash, shareholders lose the lot. That puts a big question mark over many consumer-related sectors – such as retailing, leisure, house-building and property. So, regardless of the short-market term rallies we might see in the next couple of months, we'd still be avoiding stocks dependent on consumer spending – there have already been plenty of new casualties (Wedgwood is just the latest) but there's a lot more pain to come.

Published in Economics | More articles by David Stevenson

Related articles

FREE - MoneyWeek's daily investment emailJohn Stepek

Our free daily email, Money Morning, is an informative and enjoyable analysis of what's going on in the markets. Written by our Editor, John Stepek, and guest contributors.
Sign up FREE to Money Morning here.