Britain accounts for 24 per cent of all European companies struggling to pay their creditors, way ahead of the runners-up Germany (14 per cent), Italy (12 per cent) and France (six per cent), according to research from Close Brothers Corporate Finance.
One of the reasons for this, the study goes on to speculate, is the fact that the UK has accounted for 34 per cent of all European leveraged buy-outs since 2000, more than double that of the second most geared-up nation, France.
Some of the more silver-haired (or no-haired) in the private equity community have been predicting LBO failures for a while. Jon Moulton, the founder of private equity group Alchemy, was talking about this as early as 2007 and reiterated it in an interview with GrowthBusiness in January 2008. The fact that one of Alchemy’s own investments, Floors2Go, entered administration later that year does not diminish the validity of his point.
The problem was not simply that there was too much debt – with buy-out companies owing eight or nine times their annual profits – but also that deal terms were too loosely constructed. Paul Richards, a former investment banker and industry expert, alluded to the prevalence of ‘cov-lite’ deals during the boom years at an event organised by the CFA Institute this week. He argues that such deals have given rise to an army of ‘living dead’ – private equity-owned companies that under normal circumstances would have breached bank covenants, but which are able to carry on because they were able to secure such lenient terms in the champagne-popping months before the credit crunch. Some of these may pull themselves back from the brink – others are simply enjoying an extended stay of execution.
The corporate world has learnt the danger of living beyond its means: fine while the going is good, catastrophic when things take a turn for the worse. The trouble is that our politicians refuse to swallow that bitter pill.
Government borrowing is now just under £800 billion, and rising. Ratings agency Standard and Poor’s has already indicated that the UK’s AAA credit rating might have to be downgraded as the ratio of debt to GDP goes through the roof (it’s now 56 per cent). If the UK was a company, it would be long overdue for restructuring.
The kind of arguments that have gone round Westminster in the past few months – from the storm in a teacup of MPs’ expenses to discussions about sending more troops to a far-flung country – are missing the crucial point that decisive action on the economy is needed now. I hope I’m wrong, but the signs are that the upcoming election is considered a higher priority than the crisis in the public finances.
Of course, the UK has been through economic hardship before and come out the other side, but that shouldn’t lead us to think a return to the status quo is a foregone conclusion. While we struggle with rocketing debt, the Chinese premier Wen Jiabao is talking about spending £1.3 trillion of foreign exchange reserves on acquisitions abroad. The world order is changing and if we want to retain our competitive advantage we need leaders who are prepared to make hard and unpopular decisions.
