UK interest rates have risen again this week. This trend will continue for the foreseeable future. The borrowing cost burden on companies (& individuals) is now a major problem.
The issue is exacerbated by the rise in the yield on UK government bonds. The mostly negative reaction to the mini budget has led to UK government bonds being more expensive to service.
Government bond yields are the basis for setting the interest rates paid on corporate debt.
Now, let’s add in the fact that UK corporation tax will not rise as planned. There is an obvious upside to this. But the downside is that the tax shield (interest x tax rate) is reduced. This is considering the tax rate as an isolated factor.
Operating cash flows, from which debt is serviced, are under cost pressure due to the hike in fuel costs. Yes, the UK government have capped these but only for 6 months. Company planning horizons are far longer than that.
There seems far more reasons to de-gear right now than use debt for investment. The signs are to switch to equity finance.
Alas, would you want to raise new equity capital with prices falling on the market & high levels of dilution of control for existing shareholders.
