Boom in debt market complicates FD lives

Low inflation and economic growth have sparked fierce competition among
lenders to secure deals. That, in turn, has seen a wave of innovation in the
type of debt instruments for FDs to pick from.

In 2005, more than 6.5 trillion euros (£4.4 trillion) of debt was raised in
the UK. This is the highest level of debt for 10 years. Leverage levels have
climbed to heights not seen since the 2000 dotcom boom.

Allan Leighton, chairman of the Royal Mail Group, said the level of liquidity
in the debt market is so high that there weren’t enough businesses to lend to.
‘There is more liquidity than ever. There is more money than opportunity,’
Leighton said.

This liquidity has been achieved because debt packages have become more
complex, yet more flexible. This has enabled companies to use cheaper debt and
higher leverage multiples. But if market conditions change, the complexity that
has been a blessing could become a burden.

‘At some point, the credit cycle will turn and borrowing conditions will
become tougher due to higher leverage, more disparate structures and new players
in the market,’ said Aidan Birkett, corporate finance managing partner at
Deloitte.

Birkett said that just as lending had changed, so corporate recovery had
changed. Complex debt instruments meant complex negotiations in the event of a
default.

‘There is a new era of sophistication in debt, which has its advantages.
However, with these positive trends come some disadvantages,’ Birkett said.

He says these disadvantages include more people to negotiate with, different
time pressures and more radical views on what constituted a successful outcome.

The dilemma for FDs in this environment is how to take advantage of the
plethora of financing options available, without exposing their businesses to
too much risk in the event of a collapse.

The key is striking a balance between delivering the advantages of increased
leverage, without compromising their credit ratings. New instruments such as
hybrid capital allow companies to gear up without affecting their credit
ratings.

The key for FDs is to remember that, even with such flexibility available,
the risk of a default should always be in their thoughts.

Collins Stewart Tullet chief executive Terry Smith warned: ‘It always looks
as if the good times will go on forever, but they never do.’

COMPANY REPORTS

BAE banks Sir Nigel

Defence and aerospace giant BAE Systems has appointed Sir Nigel Rudd as
non-executive director. Sir Nigel, 59, is chairman of high street retailer Boots
and deputy chairman of Barclays. He is a fellow of the Institute of Chartered
Accountants and was knighted in 1996 for his services to the manufacturing
industry. He will take up his new role on 10 September.

Sage buys Elit

Accounting software giant Sage has bought 51% of French software company Elit
Group for £10.8m in cash. Sage will make a bid to acquire the remaining 49% of
the business from shareholders. The purchase of Elit, following Sage’s purchase
of Adonix in November, strengthens Sage’s position as market leader in
accounting software in France. Sage chief executive Paul Walker says the
majority stake in Elit represents ‘a further extension of our range of
industry-specific business management software’.

On Sarbox watch

The London Stock Exchange, which could merge with US exchange Nasdaq, is
keeping tabs on a deal between the NYSE and Euronext, where advisers are working
on a complex legal formula that will prevent the enforcement of Sarbanes-Oxley
on companies listed in Europe. Lawyers working on the deal are developing a
clause that would break the merger if Sarbox were to be introduced. The US
Securities and Exchange Commission has ruled out importing Sarbox to Europe, but
politicians and market players in Paris worry the US may try to introduce it
later on.

Eurotunnel still in talks

Eurotunnel was on the brink of winning the support of its bondholders for a
debt rescue deal last week, after weeks of protest from the group. Creaking
under debt and suspended from the trading on the London Stock Exchange,
Eurotunnel has faced intense opposition to its debt restructuring proposals from
the bondholders.

GUS splits into two

David Tyler, the FD of retail and finance group GUS, as well as other
executives are facing a shareholder uprising over a pay scheme the company is
developing as part of its demerger plans. The demerger will see GUS split into
two FTSE 100 companies, Experian and Argos Retail. As part of this process,
executives stand to earn multiple share options, to the dismay of investors.
Shareholders are also upset that Tyler is set to be added to the Experian board
as a non-executive director, and chief executive John Peace as a chairman. They
are concerned that the independence of Tyler and Peace will be compromised.