Credit risk

Debt-ridden companies face increasing risk of credit risk downgrades

Companies that sell consumer goods risk being downgraded if political and market volatility continues, rating agency S&P has warned.

He said ratings pressure was “most likely to be felt” in the retail, consumer products and real estate sectors, as they were most exposed to the cost of living crisis. and some companies were heavily indebted. The agency added that if market volatility continues, “concerns about financial stability could grow” and trigger a massive increase in the yields demanded by bond investors.

Analysts said “the greatest number of weak links” were in companies selling consumer goods, as many had been saddled with unwanted debt ahead of an expected economic downturn in the UK. Andrew Bailey, the Governor of the Bank of England, said interest rates should rise more than initially expected to fight inflation.

Gareth Williams, head of corporate credit research at S&P Global, said: “Borrowing costs are rising and when companies need to refinance they are very likely to pay more. In some cases, if they have to borrow at very high interest rates, it could tip them over. But we have to keep this in the larger context of the past few years. Companies were able to refinance and borrow at very, very cheap interest rates and many companies blocked them.

Analysis by the UK non-financial corporate ratings agency found that $96.3bn (£85.3bn) of bonds, loans and revolving credit facilities were due to mature over the course of the next 18 months, which represents about 10% of total corporate debt. The research showed that $5.7 billion of that was considered junk debt as of July 1.

The consumer products sector will see the largest volume of debt coming due and S&P said refinancing would be “difficult” for companies with low-rated bonds and loans. Its analysts said in a research note: “In the near term, rating pressure will likely be felt in consumer-focused domestic sectors such as retail, consumer products and real estate. Financing conditions remain difficult, with more expensive and less accessible debt.

Matalan is looking to find a buyer as he faces £350million in debt coming due next year. The retailer, which employs around 11,000 people in more than 200 stores, admitted in June that its ability to refinance its debt involved economic factors beyond its management’s control. It emerged that Elliott Advisors had entered into talks with John Hargreaves, the founder of Matalan, to possibly fund a bid to buy the retailer.

S&P said many companies were in a strong financial position ahead of another cut in consumer spending and an increase in the cost of borrowing, and that many were shielded from the nation’s economic woes as they derive just 23% of their revenue. from the country.

Williams said: “Everything that has been done to help during Covid means the corporate sector is in a better place than it could have been, and so that’s a big offset. But the fundamental reality is also that the cost of borrowing is rising and inflation is back. It’s a different world from the one we’ve been living in for ten years.