A wave of businesses across the UK and the rest of Europe is at risk of sinking with new figures showing the default rate on business loans has doubled.
Businesses across Europe, including the UK, face a € 1.8 trillion (£ 1.5 trillion) wall of debt maturing over the next four years, including 290 billion euros in 2021, according to data from S&P Global Ratings provided to The daily telegraph. The threat of greater corporate distress looms as government support wanes and bond yields rise.
S&P revealed that the UK and Europe default rate was 5.4% in February, more than double the levels seen a year earlier shortly before lockdowns spread across the region.
UK business defaults last year were also twice as high, with department stores, cinemas and restaurants feeling the most pressure, S&P revealed.
Companies have sought to take advantage of ultra-low interest rates and government loan programs to fend off debt risk. But City analysts have warned that high leverage could weigh on the economy’s recovery and predicted a resumption in defaults if government support is withdrawn prematurely.
S&P said the amount of debt maturing in the UK this year was below normal as companies sought to refinance during the pandemic.
“The financing conditions have been so favorable that most companies opportunistically called much of their debt fixed rate,” he said.
Daniel Grosvenor, director of equity strategy at Oxford Economics, said there was “limited short-term risk” but warned that “many companies are likely to run into difficulties if political support is withdrawn too quickly” . “This issue added to already high debt levels and is likely to have increased underlying vulnerabilities.” He said corporate debt is “well above historical averages in all regions and solvency ratios are extremely low.”
Corporate debt could hold back the recovery if companies are forced to repay debts rather than investing and hiring new staff.
While low interest rates have helped prop up companies during the pandemic, the recent rise in bond yields also risks exposing debt problems.
“Vulnerabilities could emerge if corporate bond yields soar or credit conditions tighten,” Grosvenor said.
He added that a high number of “zombie” companies could “weigh on economic growth as they tend to be less productive and invest less than their healthier counterparts.”
The rise of so-called zombie companies, usually defined by their ability to pay interest on their debt, have been a major concern during the pandemic as global corporate debt swells.
Nick Hood, a 50-year insolvency veteran, said the liabilities of these companies typically exceeded their assets by at least £ 10,000 in their last accounts.
Brittany The debt pile has skyrocketed during the pandemic. Public debt stood at 97.5% of GDP in February, the highest level since the early 1960s, while borrowing that month hit a record £ 19 billion.
This is an increase of £ 17.6bn from the same period last year, with £ 4bn spent on job creation alone.
A second year of heavy borrowing is expected in 2021-2022 with restrictions that should not be completely lifted before June 21.