The Big Picture
FTSE350 net debt reaches record high
100 150 200 250 300 350 400 450 500
50 0 2008/9 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19
Source: Link Asset Services
The largest 350 companies listed on the Lon- don Stock Exchange’s main market are holding more debt than ever before at a time when profit growth has stalled, writes Mark Dunne. The combined net debt of FTSE350 constituents swelled by 5.8% in the last financial year to a record £443.2bn, Link Asset Services says, while their operating profit was flat after two years of strong growth. The £24.2bn added to their aggregate debt pile during the period made it the eighth consecutive year that borrowing by the UK’s largest main mar- ket-listed companies has increased. Net debt in the FTSE350 has expanded by around 75% during this period, fuelled by the low interest rates that were introduced following the financial crisis. On the surface, these figures and flat profit growth paint a bleak picture, especially when warnings that the global economy is slowing down are thrown into the mix. Investors could be forgiven for asking if some of these companies would be able to repay their debts and fund increased divi- dend payments.
What may ease investor concerns is that FTSE350
companies are sitting on £195.1bn of cash, almost 9% more than they did at the start of that financial year. This could, according to Link, fund two years’ worth of dividends by the companies in question. This means that debt is now 2.6 times greater than operating profit but below the 4 times thresh- old where companies struggle to repay their debts. Despite rising net debt, the companies in this sample are not showing any strain with debt/equi- ty, assets/liabilities and short-term/long-term ratios all improving year-on-year. Most of the increase in borrowing was by the 100 largest companies as many of the smaller busi- nesses in the FTSE250 are more vulnerable to the UK economy and so, it seems, are more cautious. Link Market Services’ chief operating officer, Michael Kempe, said that considering UK plc’s debt pile in isolation does not tell the whole story, believing that the increase in borrowing in 2018/19 is not a cause for concern. “It’s well backed by assets, and easily serviced at present by the profits companies are making. There are of course com- panies and sectors under strain, but the overall picture is reasonably comfortable,” he added.
12 | portfolio institutional | December-January 2020 | issue 89
Net debt in billion £
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