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During this time, the pressure of debt on Businesses can help to ease such concerns
borrowers was light or negligible. by being transparent. Research shows that
the more firms disclose financial and non-
The base rate has recently climbed from financial information, the more likely they
low levels are to be able to secure loans and access
Companies that got used to being able to lower rates. This also applies to companies
borrow at a low cost are now starting to feel that are more open with external partners by
the pinch, or even come under extreme sharing resources and knowledge to enhance
pressure if they are heavily indebted. This is innovation. The more information a bank has,
what worsened the financial position of UK the more comfortable it will be about lending
utility Thames Water. When the company was to a company. It also reduces the bank’s own
privatised in 1989, it had no debt. But over risk rating, allowing it to lend more and offer
the years it borrowed heavily to fund new lower rates.
investments.
What to look out for in the current
Generally speaking, debt is a prudent low-cost environment
source of finance with low interest rates fixed Business leaders that are addressing rising
for the long term. But Thames Water borrowed interest rates head-on may announce
too much. It had £14 billion in debt by the end adjustments to their growth or expansion
of June 2023, which amounted to 80% of the plans, especially if a plan previously relied
value of the business and made it the most heavily on debt. They may also consider
heavily indebted of England and Wales’ water different sources of finance. The UK water
companies, according to analysts. Its loan regulator, for example, has called on utilities
repayments were not only linked to the bank to consider the role of equity funding (for
base rate, but also inflation, which has also example, selling shares) and not just debt in
spiked over the past year. This triggered fears financing new investment.
about the company’s ability to continue to
service its debts. A company’s ratio of debt versus assets will
also tell you how much it holds in debt. A
Thames Water was lucky, in a sense – it “good” debt ratio is around 1 to 1.5, but the
avoided being nationalised because it ideal can vary by industry. Manufacturers, for
was able to secure timely funding from its example, tend to need a lot of equipment and
shareholders. But the situation revealed the so may have ratios greater than 2.
extent of the iceberg under the water in this
industry. Shortly afterwards, another English More interest rate rises will pile pressure on
utility, Southern Water, announced it would not companies, employees and the economy. But
pay dividends until at least 2025 after its credit by anticipating the impact on their debt and
rating was downgraded. This shows investors, being more open about their current state and
lenders and credit ratings agencies are getting future plans, businesses can help to minimise
more nervous about debt-related trends within the pain.
industries.
theconversation.com/uk/business
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