Jeremy Warner's Outlook: Bad debts are beginning to creep up, but this is no banking crisis as they used to be known

<preform>Network Rail wants employee buyout too</br> Private equity bids: how big can they get?</preform>
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But the banking cycle has been abolished, right? Not quite, to judge by yesterday's trading update from Barclays, which said that impairment charges, or bad debt write-offs, are now expected to be somewhat higher than forecast last February. In previous banking cycles, it tended to be corporate debt write-offs that poleaxed the profits. This time around the deterioration is mercifully confined to credit card business and other forms of unsecured, consumer lending. Overdrafts and corporate lending are unaffected, Barclays insists.

But the banking cycle has been abolished, right? Not quite, to judge by yesterday's trading update from Barclays, which said that impairment charges, or bad debt write-offs, are now expected to be somewhat higher than forecast last February. In previous banking cycles, it tended to be corporate debt write-offs that poleaxed the profits. This time around the deterioration is mercifully confined to credit card business and other forms of unsecured, consumer lending. Overdrafts and corporate lending are unaffected, Barclays insists.

Given the consumer credit boom of the past five years, which has seen British household debt soar to more than a trillion pounds, it would have been a little bit surprising if there hadn't been a rise in what Barclays delicately calls "delinquency". Personal bankruptcies have been on a strongly rising trend and you only have to look at the madness of Rosie Millard, the former TV reporter who recently admitted to juggling £40,000 of debt on her credit cards to finance a high spending lifestyle, to know that many are living well beyond their means. It's the banks that have encouraged them to do so, and with higher interest rates, the likes of Barclays will now have to share at least some of the consequent pain.

Yet though banking shares were badly unnerved by Barclays' remarks yesterday, with Barclays down 4 per cent, compared to previous banking cycles we are still talking about an extraordinarily shallow downturn. Of course things might get worse, especially if interest rates rise any further, but with unemployment incredibly low by historic standards and earnings still growing strongly, there's little reason to believe the rise in bad debt experience is about to turn into a systemic problem.

Barclays was forecasting some £1.4bn of bad debts for this year. Even if that were to rise by say 10 per cent, it's hardly enough to derail the bank. Back in the early 1990s, bad debt experience caused Barclays to plunge into loss. That's not even remotely likely this time around. None the less, a rich seam of growth for banking profits and revenues has now quite plainly been exhausted. The mortgage market too is slowing fast.

So where does John Varley, the chief executive, expect to find his promised double-digit revenue growth? Step forward Bob Diamond, head of Barclays Capital, the company's stripped down investment banking operation. He's defied the sceptics in delivering an extraordinarily effective money making machine, yet an awful lot now rests on his continued success.

After years of lurking in the shadows, Mr Diamond is about to join the main board, which means we finally get to find out exactly what he is paid. All we know for sure is that it is a lot more than Mr Varley. The great bulk of Mr Diamond's rumoured £20m package is in the form of performance related bonuses. It may be that he will have to earn them as never before.

Another banking meltdown? These do indeed seem to be a thing of the past, yet the easy pickings of recent years may be over too.

Network Rail wants employee buyout too

Spedan Lewis has a lot to answer for. Seventy-five years after the founder of the John Lewis Partnership introduced the world to his unique form of company ownership, employee share buyouts are suddenly all the rage. The Royal Mail's Allan Leighton wants to arrange one and now so too does the chief executive of Network Rail, John Armitt.

Both are state-owned companies, if you ignore the statistical fig-leaf provided by Len Cook, head of the Office for National Statistics, which allows the Government to keep Network Rail's humungous debts off the public finances by classifying it as private business. Both organisations are also networks - one delivers the letters, the other the trains, which no more need to be under state control than the gas, electricity or telecoms grids. And in both cases, a John Lewis-style corporate structure could liberate the business from the dead hand of Whitehall whilst at the same time falling short of full-blooded privatisation.

But in some other important respects, they are very different animals. Royal Mail has gone through a painful three-year restructuring and has earned the right to some form of partial privatisation. Network Rail, on the other hand, is a reminder of what can happen when a privatisation goes wrong, being the successor to the ill-fated and unlamented Railtrack.

Moreover, whereas Royal Mail now makes real bottom line profits, Network Rail has only got into the black with the help of some £2bn in state hand-outs. Take those away and the financial turnaround reported yesterday by Network Rail would not look nearly so impressive. On a brighter note, Network Rail does not have Royal Mail's £4.5bn pension fund deficit to worry about. But then, Royal Mail is not saddled with Network Rail's £15.6bn of net debt. This is projected to rise to £20bn in two years time, which would make it even trickier for the company to take on yet more borrowings to fund the purchase of shares from the Government.

In neither proposal would the nasty capitalists of the City be allowed to get their hands on the business - the shares would not be available to outside shareholders. That hasn't stopped the postal unions from seeing an employee buy-out as the thin end of the privatisaion wedge. Yet if Allan Leighton can persuade the ex-postie and now Secretary of State for Trade and Industry, Alan Johnson, that it is a good idea, then who knows.

Private equity bids: how big can they get?

Another day, another rumoured private equity mega-bid. With the exception of Philip Green's mooted offer for Marks & Spencer, there hasn't so far been a fully fledged private equity bid for a FTSE 100 company, yet despite the challenge of financing such an endeavour, the stock market is convinced it is only a matter of time. Yesterday's rumour was Whitbread. Over the last two months, J Sainsbury, Wm Morrison Supermarkets, Boots and Diageo have all been suggested as possible targets.

These rumours are In part a response to the burgeoning size of the funds at the disposal of the private equity houses. Money is pouring into them as never before in a now almost desperate search for decent rates of return. Blackstone Group, the US based private equity house, this week launched the biggest fund ever, an $11bn mother of a thing. All that money has to be invested somewhere. Undervalued British and Continental companies make a happy hunting ground.

As the amount of money available to invest grows, the targets grow bigger too. Not so long ago, anything above £100m was thought a big deal. Now, the £1bn plus private equity takeover is a commonplace. As Mr Green demonstrated, the finance is there for bigger still. As more money chases an ever dwindling pool of suitable targets, the returns are bound to shrink. Furthermore, the larger the deal, the bigger the equity element demanded by the debt holders in the financing, further reducing the returns.

Yet there are good reasons for thinking the growth in private equity more than just a flash in the pan, another bubble that will recede almost as quickly as it arrived. One is plainly private equity's ability to attract executive talent with potentially much higher rewards than is available in the goldfish bowl of the publicly quoted arena.

But the more important reason is growing institutional aversion to equity and a new found love affair with the cult of fixed income. It makes perfect sense in these circumstances to shrink the equity and replace it with debt, which is essentially what happens in a private equity takeover. The fact that replacing equity with debt makes the debt high risk too doesn't yet seem to have occurred to those who insist that bonds are the future for investment.

j.warner@independent.co.uk

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