View from City Road: Beneficiaries of the rate cut

IT WAS the indirect rather than direct effect of an interest rate cut that was exciting stock market investors yesterday. Initially it will benefit consumers more than companies.

Whereas the vast majority of mortgage holders will in time see their monthly outgoings fall, most companies will not be so lucky. This is because the move to fixed rate borrowings, which accounts for perhaps 20 to 25 per cent of mortgages of less than three years old, is far more advanced among corporate borrowers.

Like consumers, companies have been cutting their debts sharply. The financial deficit hit pounds 24bn two years ago but shrank to pounds 11bn last year. A further fall is likely in the current year. Quoted companies, which are far more liquid than their unquoted counterparts, have cut their ratio of net debt to shareholders' funds from 34 per cent at the end of 1989 to 27 per cent last year.

Many of those with the highest gearing ratios have fixed-rate borrowings. Take Siebe, which has gearing of 78 per cent. The bulk of its borrowings are in the US, raised to pay for Foxboro in 1990. And half are fixed at various rates for periods of up to 10 years.

Tiphook, the container company, has locked into fixed rates for 90 per cent of its US and UK borrowings. Like many other UK companies it already pays less than 9 per cent - the new level of base rates - with its average interest rate at 7 to 7.5 per cent, thanks to a large proportion of US debt.

Companies are operating in interest rate sensitive markets so have every reason to limit the impact of market movements on their finances.