UK plc borrowing rose for the eighth consecutive year in 2018/19, according to the latest Link Group UK plc Debt Monitor. Net debt (total borrowings less cash), jumped 5.8% to a new record of £443.2bn, even allowing for higher cash balances. Net debt has now risen by three quarters since the low point reached in 2010/11, when companies were still adjusting to the disruption caused by the financial crisis and subsequent recession. The £24.2bn increase in 2018/19 comes at a time when UK plc profitability is under pressure: operating profits were flat year-on-year after growing strongly over the previous two years.
From credit crunch to credit binge
After years of rock-bottom interest rates, the debts of the UK’s listed companies have risen to a new record. By the end of the 2017/18 financial year net debt had soared to £390.7bn1 (total debts less cash). Since its low point in 2010/11, in the vice of the credit crunch, net debt has jumped by 69%.
Fastest growth in the oil sector
The oil sector has seen the fastest growth in net debt, up 459% since 2008/9. In 2017/18, BP and Royal Dutch Shell accounted for an astonishing £1 in every £7 of all UK plc’s net debts. Faced with a collapse in the oil price in 2015, both undertook major restructuring exercises, and took on additional debt to fund their activities and help maintain their dividend payouts while profits were at rock bottom.
How much debt is too much?
The debt/equity ratio provides a useful measure of how highly geared a company is, or in other words, how large its debt burden is.
Justin Cooper, CEO, Link Market Services said “The economic recovery since the credit crunch has been slow, but very long, and some commentators suggest the cycle may be drawing to a close. Total borrowing may continue to rise as it’s a vital part of the investment financing-mix, but gearing or the burden of debt is on the wane. Investors may prefer to see UK plc focus on reducing gearing further to provide itself more breathing space in the next global downturn.”