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The early casualties of the global debt binge are starting to show up – and not just in the record levels of consumer bankruptcies.
The UK’s third-largest DIY chain, Focus, is in talks on restructuring its debt to avoid insolvency. It’s thought to have senior debt of more than £160m, according to The Telegraph.
The group is owned by private equity groups Apax and Duke Street Capital. The news comes just a day after Jon Moulton of Alchemy Partners said that he expects default levels across Europe to soar from the current 3bn euros to as much as 40bn euros in the next few years.
So is this the start of something big?
Alchemy Partners’s Jon Moulton has said that he believes default levels across Europe are set to soar in the coming years. Default rates are currently at about a tenth of the average of the last 20 years – and as most things tend to revert to the mean, that suggests he’s right.
“The debt markets have been very loose and low on credit standards. There is basically 100% agreement there will be an increase in defaults and more problems.”
Credit ratings agency Standard & Poor’s warned last week that “the average debt payment burden on outstanding leveraged buyout deals was four times above the normal safe level.”
The group’s credit strategist, Blaise Ganguin, said: “There is very little margin for error. Any hiccup, whether in currencies, commodity prices, or wage settlements could push these companies over the brink.”
And in the 2007, there’ll be plenty of scope for such hiccups – especially with consumers in such a vulnerable position.
“Focus is particularly unfortunate since it has been bitten at both ends by the debt monster,” said Damian Reece in The Telegraph. The DIY group is having a tough time making its own debt repayments, largely because debt-laden consumers are also having trouble with their own balance sheets.
It’s not the only company having problems on this level. Doorstep lender Provident Financial also reported yesterday that bad debts were growing faster than revenues. As more consumers run into trouble, pushing up the bad debt side, so others are cutting back on their spending to try to avoid running into problems, which cuts into new loan growth.
So it seems hard to deny that companies – particularly consumer-facing ones – are set to have a tougher year ahead than they have in a long time. With interest rates ticking higher, and consumers devoting all of their spare cash to getting onto the housing ladder, conditions can surely only worsen.
And yet, until the shocks start to hit home, it seems that there’s still plenty of appetite for buy-outs out there. Investment bank Merrill Lynch has just upped its price target for fashion chain Next. The company has been suffering somewhat at the hands of rival Marks & Spencer recently – but Merrill isn’t looking for a turnaround story.
No, the bank reckons that Next, with its hefty cash flows, would make a great leveraged buy-out (LBO) target.
“Our analysis suggests that an LBO could deliver attractive returns up to a takeout price of £25, secured by Next’s £300m annual free cashflow.”
It seems the party’s not over yet – but we reckon the hangover will be of epic proportions.
Turning to the stock markets…
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An exceptionally strong performance from medical supplies firm Smith and Nephew was not enough to prevent the FTSE 100 from ending yesterday in the red. The index of leading shares closed 12 points lower, at 6,247, with oil stocks weighing heavily. For a full market report, see: London market close.
Across the Channel, the German DAX-30 gained 8 points to close at 6,597, its highest close in six years. In Paris, the CAC-40 closed 11 points higher, at 5,530.
On Wall Street, stocks closed lower on profit-taking. The Dow Jones ended the day 4 points lower, at 12,441, as did the S&P 500 which closed at 1,422 yesterday. The tech-rich Nasdaq ended the day 21 points lower, at 2,435.
In Asia, the Nikkei closed at 16,776, a 185-point fall.
Crude oil had fallen 11c to $62.10 a barrel this morning, whilst Brent spot last traded at $61.71 in London.
Spot gold last traded at $616.85 today.
And in London this morning, broadcaster ITV announced that trading had been as bad as expected this year, with revenues down 12.5%. Falling advertising spend and competition from digital channels have been blamed for the channel’s poor performance. ITV said that there will be no extra money for programming in 2007.
And our two recommended articles for today…
Will 2007 be a good year for investment markets?
– The third year of the US presidential cycle is usually great for equities. So, almost 3 years on from the last election, why is Martin Spring feeling so nervous? To find out why inflation is likely to be a bigger problem than most experts expect next year, read: Will 2007 be a good year for investment markets?
What key commodities tell us about the economy
– Copper, gold bullion and oil prices are all good indicators of future economic activity. The RH Asset Management team look at what clues these commodities are currently giving us and how they will affect your investments. Click here: What key commodities tell us about the economy