Many listed companies are under-leveraged and have not seized the opportunity created by cheap debt to increase gearing, fund transaction activity or plug pension shortfalls, according to a new report by Deloitte.
Kevin Beary, director responsible for debt advisory services at Deloitte, says, ‘Corporate loan multiples are on average two times debt to EBITDA compared with an average of closer to five in private equity. This places listed companies at a comparative disadvantage in terms of the efficiency of their capital structures. Three years ago the interest margin on a five year loan for a triple B credit rated company would cost around 90 basis points on EURIBOR, and a similar loan today would cost approximately 60 basis points, a reduction of a third. For many companies there is still the opportunity to take advantage of attractive funding conditions to improve capital structures and fund pension deficits’.
Moreover, by not capitalising on this situation, corporates may be inadvertently leaving themselves open to hostile takeover bids. According to David O’Flanagan, national head of the corporate finance practice at Deloitte, ‘Globally, the private equity market raised ?248 billion in 2005. Based on an average equity to debt leverage ratio of three, this means there is around ?1 trillion looking for assets to acquire. While the corporate market lets its capital reserves gather dust, the private equity industry is looking to invest 43 percent of the market capitalisation of the FTSE 100. A balance sheet that can absorb more debt, could also absorb the debt of a leveraged private equity takeover bid’.
However, on the flip side of the coin, the research has shown that while new complex debt instruments have brought increased liquidity to the market, there are potentially dramatic fall-out consequences where highly leveraged businesses do not meet expected growth.
Rory O’Ferrall, reorganisation services partner at Deloitte, says, ‘The increased trading of complex debt instruments, particularly in the last two years, has made restructuring a much more difficult task. In some cases, complexity may create a bar to restructuring. There are an increasingly large range of creditors who may well have differing motives when a business is in distress. This can be especially difficult for the management of the business if, for example, some of the creditors want to pursue a quick exit rather than a longer-term rescue strategy. |
