UK plc debts soar to record high

Here’s what you need to know

After years of rock-bottom interest rates, the debts of the UK’s listed companies have soared to a record high of £390.7bn, easily surpassing pre-crisis levels, according to the new annual Link Asset Services UK plc Debt Monitor.

In the vice of the credit crunch, companies had cut their borrowings by a fifth in just two years. But since the low point in 2010/11 net debt has jumped by a staggering £159.6bn. Moreover, most of this increase (£122.6bn) has been in the last three years alone.

Over the same three-year period UK companies have paid their shareholders £263bn in dividends, despite profitability being squeezed and dividend cover levels (the relationship between profits and dividends) falling to record lows in 2016/17, before recovering this year.

Faced with the demand from shareholders to continue their payouts, and needing also to invest in new assets and acquisitions, companies had to increase their borrowings significantly.

This is particularly so in the oil sector. The oil sector has seen the fastest growth in net debt, up 459% since 2008/9. In 2017/18, BP and Royal Dutch Shell accounted for an astonishing £1 in every £7 of all UK plc’s net debts. Faced with a collapse in the oil price in 2015, both undertook major restructuring exercises, and took on additional debt to fund their activities and help maintain their dividend payouts while profits were at rock bottom.

In Shell’s case, net profits over three years of £15bn compared to dividends of £31bn. Its net borrowings rose by £35bn, though this includes the absorption of the debts of BG Group, which it acquired in 2016. Almost one-third of the £122.6bn increase in net UK plc debts since 2014/15 was in the oil sector.

The consumer goods sector is the UK’s largest borrower, accounting for almost a quarter of UK plc net debts. Tobacco giants Imperial Brands and British American Tobacco account for almost three-quarters of all the debt in the sector.

BAT has recently taken on huge additional borrowings to finance its acquisition of Reynolds American, assuming the latter’s debts in the process. Its £45.4bn of net loans are the largest of any company in the UK, accounting for £1 in every £11 of UK plc’s borrowings. Consumer staples groups Unilever and Reckitt Benckiser make up the rest of the sector’s debts. Housebuilder Persimmon, by contrast, boasts net cash of £1.3bn, the highest net cash position of UK plc.