Corporate financiers fear interest hikes will damage deal activity

The Bank of England increased its interest rates by a quarter of a point to
5.25% last year, and after December 2006 statistics showed that inflation had
jumped to a ten-year high of 3%, economists have forecast that further interest
rate hikes are inevitable.

The forecasts have grabbed the attention of dealmakers, especially those
working for accounting firms, who have been banking on a buoyant merger and
acquisition market to sustain the high levels of growth the profession has
enjoyed over the last two years.

Nick Hood, a partner at insolvency firm Begbies Traynor, said the recent
0.25% rise was unlikely to have an immediate impact on corporates and deal
activity, but warned that if further tiny interest rate increases went ahead as
forecast, the M&A market would start to feel the pinch.

‘I am not entirely convinced that for most UK corporates a quarter-of-a-point
makes too much of a difference,’ said Hood.

‘What I do think you get is a psychological impact, especially if we get
another quarter point, which will mean four interest rate rises in seven or

‘Then… stakeholders in the financial community will be beginning to look at
some of their risks and say: “Is this quite as good as it was, should I be
taking closer order with it.”’

Hood said the first signs of leveraged buy-out failures were emerging as
deals closed on high multiples, such as the transaction involving printer
Polestar, were starting to fold.

Tim Murphy, debt advisory partner at Deloitte, said the recent interest rate
rise was unlikely to have an impact on deal volumes, but said the structure and
amount of debt used to finance deals would have to be revisited.

‘The recent rate rise would have been factored in to current deals, so I
don’t see an impact on deal volumes. What the banks and providers are going to
have to start looking at is the amount of debt that gets put into deals and the
structure of that debt,’ Murphy said.

He added that an indirect consequence of the rising rates would be the impact
on consumer confidence.

‘The reaction of consumers to the interest rate rise will have to be watched
carefully as that is were the real effect of interest rates could start hurting
business,’ Murphy said.

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