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FRP Advisory

How recent interest rate rises have impacted the debt funding market

20 July, 2023

Tom Cox Partner - Debt Advisory, FRP Corporate Finance explores the impact recent economic turmoil has had on the debt funding market

To combat surging inflation driven by the wholesale energy market and wider supply chain dislocations – which were arguably exacerbated by the market reaction to the Government’s ‘mini-budget’ in October 2022 – the Bank of England (BoE) has hiked interest rates to 4.50 per cent, representing the most accelerated rise in borrowing costs since 1989, with further rate rises a distinct possibility. As a result, borrowers are likely to face increasing scrutiny from lenders in assessing debt capacity in 2023.

In a previously low interest rate environment, the idea of rates approaching 5 per cent was viewed as cataclysmic for many, but the reality is that firms’ must continue executing on their growth strategy and delivering value for their clients in order to mitigate the increasing drag on underlying cashflows.

Nevertheless, the BoE’s chief economist Huw Pill recently commented that the UK must also look to avoid an elongated inflation spiral driven by wage price inflation without a cut-back on discretionary spending. UK plc must accept the outlook is more challenging and focus on targeted investment to stimulate growth.

While credit markets may be harder to navigate, they will continue to offer an avenue for capital raising for many corporates and with this in mind, our team are on hand to advise of clients on how best to familiarise themselves with the current funding landscape.

Aside from the far-reaching implications rate rises will have on consumers’ behaviour and personal finances, prolonged rate rises will also temper the appetite of many firms – especially those in the lower and mid-market – to continue investing for growth through debt funding.

While the International Monetary Fund recently commenced that increases in borrowing costs are likely to be “temporary” once sustained excess inflation is brought under control, and longer-term rates should revert to lower levels than the long-term average in order to combat low productivity and ageing populations, the short-term impact on investment could still be profound.

To many a stagnation in debt funded growth investment may seem like a natural outcome – higher interest rates make the option more expensive, while the difficult operating landscape may encourage businesses to save what cash they have and retrench their operations.

However, past experience shows us that firms that continue to invest during an economic downturn are most likely to weather the storm in the long run. With this in mind, it’s important for business owners to familiarise themselves with the current funding landscape and understand how best to navigate it.

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