An analysis that Altenburg recently undertook of lending data from UK banks show that, the market’s current expectation of interest rate rises over the next nine months will cost businesses an extra £13.6bn a year in loan interest payments*.
Our study found that UK businesses with floating rate loans are currently paying £17bn annually in interest payments. Following recent interest rate rises, markets currently expect that rates will increase by a further c.350bps to c.5.75% within the next nine months, taking the value of loan repayments by businesses to £30.6bn, an increase of £13.6bn.
As we discussed in The Times today, sharp rises in interest rates are going to cut into profits and could put many businesses at risk of breaching their lending agreements. This is because loan covenants often state that a business’s borrowing costs cannot exceed a certain percentage of its profits before interest and tax. If a business breaches these agreements, the lender could demand immediate repayment of a loan, or a contribution of additional equity to “cure” the breach of the covenant by partially repaying the loan.
Some businesses may not be fully prepared for such a significant increase in their borrowing costs. Some have only stress tested their business model against a further 1-2% increase in interest rates, rather than the further 3.5% increase the market is currently forecasting.
However, it is important to note that market expectations of future interest rate movements are typically only directionally accurate over a short-term horizon. Rates could rise even higher than the current market consensus depending on how economic conditions develop.
If businesses think they will struggle to meet their loan repayments, they should consider options to reduce their payment obligations. This could include refinancing or talking to their lenders about amending the term of their loans to reduce annual repayment obligations.
There are also several ways in which businesses can mitigate the impact of rising interest rates. This includes fixed rate loans or fixing the interest rate on variable rate loans, using an interest rate swap to protect against future movements in the Bank of England base rate. Other options include interest rate caps and collars, which lock in minimum and maximum levels for floating interest rates.
ACP Altenburg Advisory is part of ACP, a leading independent debt advisory association for SME and mid-market companies, advising clients on the options available to them and providing hands on support from day one all the way through to drawdown of the funding raised.
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*Analysis of Bank of England data on lending to private non-financial corporations, as of 31 August 2022