Bank of England’s warning wins support

Neil Darke, a director at UK broker Collins Stewart, gave measured support to the Bank of England’s Financial Stability Report, which warned of the danger of increased coporate debt as companies review the amount of leverage in their balance sheets.

The bank’s twice yearly report highlighted the concern that a change in attitude to corporate debt might coincide with a worsening in the economic climate and put companies under an intolerable strain.
Darke said the cheap availability of credit had fuelled a boom in private equity buyouts and in the last six to nine months public companies had looked to private equity strategies as a defence against corporate takeover.
But he said the amount of debt in public companies remained conservative compared to that in leveraged buyouts.
He said: “Marks & Spencer, the rejuvenated UK retailer, is a good example. It sold its financial services business, returned money to shareholders and gently releveraged. It is all part of being shareholder friendly. But the stock market tends not to like a lot of leverage.”
The report listed five other areas that could pose a threat to the financial system including the low risk premium attached to assets around the world, high levels of household debt in the UK and the economic imbalance between the US and other large economies.