BusinessCorporate FinanceCredit crunch pressures FDs

Credit crunch pressures FDs

Bank of England concerned about the level of corporate indebtedness and the possible causes of a credit crunch on UK economy

Growing fears that UK companies may be vulnerable to a correction in the
corporate lending markets could feed through to the level of profit warnings
issued by listed groups in the future.

The Bank of England has recently expressed concern about the level of
corporate indebtedness and predicted that a credit crunch could cause a 1.5%
contraction in the UK economy and see house prices fall by 25% and commercial
property values drop by 35%.

Keith McGregor, a corporate restructuring partner at Ernst & Young, said
that if such a credit correction did occur, it was likely to cause an increase
in the level of profit warnings issued by corporates.

‘The threat of a credit crunch makes it difficult for company FDs to produce
forecasts on cost of capital and revenues. A credit correction would feed
through to the consumer end and affect demand, which would see a number of
companies forced to come back to the City to update forecasts,’ said McGregor.

A credit crunch would add to an already high level of profit warnings. In its
quarterly analysis of the number of profit warnings issued by listed companies,
E&Y found that the number of warnings in the second quarter of 2006 was
marginally down on the first three months of the year.

Over the period, 80 companies issued profit warnings with four of those
businesses making two warnings. The figure was 11% down year-on-year, but just
1% lower than Q1 2006.

It was the smaller listed companies which carried the brunt of the warnings,
as the number of announcements from FTSE 350 companies more than halved from 16
in Q1 to six in Q2. Almost two-thirds of the warnings came from companies listed
on AIM. ‘Smaller quoted companies are more vulnerable to profit warnings because
they have a higher concentration of clients. If they lose one contract the
impact is huge,’ said McGregor.

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