LONDON, Oct 8: When recession looms and the markets tumble, debt becomes a dirty word. That time is now.
The City of London is haunted by the spectre of a high-profile corporate collapse of the kind that rocked the establishment in the early Nineties: Polly Peck and Robert Maxwell’s business empire come to mind. Both took on too much debt, although fraud was also a major factor.
But other companies failed simply because their liabilities exceeded their assets. Property groups such as Mountleigh, Speyhawk and Rockfort went under because they could not afford their interest payments.
A similar fate awaited firms in other sectors, especially those that overextended themselves just as the economic cycle took a turn for the worse. John Gunn’s industrial conglomerate, British & Commonwealth, and retailer Lowndes Queensway were both forced to call in the receivers.
ABN Amro, the Dutch investment bank, last week published a research note on the indebtedness of many of Europe’s largest companies. A number of British groups are among those that ABN considers to have stretched balance sheets: BA, BSkyB, Telewest, Invensys, United Utilities, and Scottish Power are on the list.
George Hodgson, the bank’s market strategist makes the point that the risk-aversion of the credit markets has resulted in the development of debt structures that increase the investment risk for equity investors.
“If a company’s credit-rating is downgraded, coupon repayments on loan stock increase, which offset much of the benefit of lower interest rates.” ABN’s research finds that “as confidence evaporates, the debt burden on many companies in Europe is becoming a major concern. The US economy is threatened by a sharp recession this winter and European growth forecasts for 2001 and 2002 have been cut back significantly.”
In the current downturn, technology, media and telecoms companies are particularly vulnerable. Cable groups Telewest and NTL, for example, have never made a profit, but each has invested heavily in fibre-optic infrastructure in the hope of persuading millions of people to subscribe to pay-TV and high-speed internet services. Six years ago, it all seemed like a good idea.
The government of the day was determined to break the power of BT, and to generate competition. BT was banned from relaying broadcasting services through its copper wire network, while rivals were allowed to use the former state monopoly’s exchanges to reach new customers. The opportunity was there for cable to make an impact.
But demand has not yet reached a level that offsets the industry’s massive financial outlay of at least $30 billion. In large measure, the companies have themselves to blame. Cable television programmes have been criticized as being of poor quality and no match for BSkyB, the satellite television company controlled by Rupert Murdoch. Cable has not marketed itself well, and BT has proved adept at luring back customers by offering attractive call charges.
But one of the Square Mile’s largest fund managers says: “I suppose the question is how long these backers will stick with their investments.”
“There are no short-term funding requirements, and in the case of NTL, it is seeking to cut borrowings by selling its broadcasting business. But clearly the share prices are weak and people are hoping that the markets will pick up soon.”
Arguably, Marconi is a more worrying proposition. The former GEC, headed until 1996 by the veteran industrialist Lord Weinstock, is worth just $588 million against $50bn a year ago. — Observer News Service
