Outlook: The dangers of too much debt

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HALIFAX is another of those former building societies that has more cash than it knows what to do with. When it is not using up the surplus to bid for its erstwhile compatriots in the mutual movement, it is busy returning the stuff to shareholders by the barrow load. Odd really, when the whole idea behind conversion was supposed to have been to give building societies access to capital markets, not give the capital markets access to the cash built up over decades of mutual ownership.

Never mind. The mantra these days is balance sheet efficiency and Halifax is intoning it along with everyone else. Greed is good but debt is better and woe betide the business which is under-leveraged. That is why share buy-backs are all the rage. What began as a trickle in 1996 and developed into a stream last year could easily become a torrent over the next few years. The latest estimate from Lehman Brothers, published yesterday, puts the amount of equity that could be "retired" this year, either through buy-backs or cash acquisitions, as high as pounds 30bn.

There are some compelling reasons why repurchasing share capital is proving so popular. The abolition of dividend tax credits has made equity a less attractive investment for the tax-exempt funds. At the same time, the phasing out of advance corporation tax gives companies the opportunity to buy back capital without the risk of being left with ACT payments that they will never be able to offset against mainstream tax.

Buying back shares to reduce the cost of capital is one thing. The focus is now on how to leverage balance sheets further through direct substitution of debt for equity. If Lehman Brothers is right, UK PLC has plenty more scope. Reducing the cash holdings of the top 350 companies by a half would still only bring gearing levels up to the European average. They would still be a long way behind the hugely leveraged Americans. But everything, as they say, in moderation. Those American investment banks that are promoting the corporate debt market so heavily now have conveniently forgotten how it all ended in the nasty mess called Drexel Burnham Lambert a decade ago.

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