The future of corporate Britain is at risk because of over-stretched company balance sheets, the Bank of England will warn today.
Officials will sound an alarm bell over the build-up of corporate debt relative to the value of the UK stockmarket, warning that company debt is at "a historically high level" more than three years after companies began battening down the hatches in the wake of the new technology boom.
Unless companies act to slash their debt mountains "their continued existence" could be at risk from future shocks to the economy - such as the run of accounting scandals that shook market confidence after Enron went bankrupt - the Bank will reveal in its latest quarterly report on the UK economy.
Its snapshot of corporate indebtedness mirrors the credit crunch that has seen UK consumers rack up record borrowings. In the report, the Bank highlighted the rise in secured debt (essentially mortgages) relative to households' incomes, which has increased by around a quarter over the past five years and has almost tripled since 1980. It said that the recent house-price boom, combined with the rise in homeownership, meant debt levels relative to incomes would continue to soar over the next five to 10 years.
Runaway house-price inflation has raised fears of a crash, prompting the International Monetary Fund to warn last week that the "risk of an abrupt unwinding cannot yet be ruled out".The Bank's report on company balance sheets, which excluded financial companies such as banks, insurers and fund managers, said that the "current high levels of debt might leave companies vulnerable to shocks that could affect their ability to service their debts in the future and so risk their continued existence" unless debts were reined in.
However, Bank officials also raised concerns over the danger of companies seeking to reduce their debt levels too quickly. "If the repayment of debt required a further sharp cutback in corporate spending, that would affect the outlook for the economy as a whole, including the inflation target," they said.
The report also cast doubt on the wisdom of racking up corporate debt - traditionally preferred as a cheaper way of raising cash than issuing more equity. It claimed debt was less tax efficient than commonly thought, adding: "Since the mid-Nineties the estimated tax gains to gearing have been at a historically low level."
Striking a more upbeat note, the research suggested that companies are more likely to hang on to their profits than to sharply slash capital spending. This meant it would take companies "several years" to repair their balance sheets, officials said.
Separately, figures from the British Bankers' Association yesterday painted a bullish picture of the housing market. The volume of loans approved for house purchases soared to £10.985bn in August from £10.718 in July, although remortgaging and equity withdrawal eased.Reuse content