Contact: Sorrelle Cooper
Deloitte
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Research conducted by Deloitte, the business advisory firm, into the debt market, has revealed that many listed companies are under leveraged and have not seized the opportunity created by cheap debt to increase gearing, fund transaction activity or plug pension shortfalls. Moreover, by not capitalising on this situation, they may be inadvertently leaving themselves open to hostile takeover bids.

Aidan Birkett, Managing Partner of the Corporate Finance Practice at Deloitte, commented: “Globally, the private equity market raised €248 billion in 2005. Based on an average equity to debt leverage ratio of three, this means there is around €1 trillion looking for assets to acquire. While the corporate market lets its capital reserves gather dust, the private equity industry is looking to invest 43% of the market capitalisation of the FTSE 100. A balance sheet that can absorb more debt could also absorb the debt of a leveraged private equity takeover bid.”

James Douglas, Co-Head of Debt Advisory at Deloitte, went on to explain: “Corporate loan multiples are on average two times debt to EBITDA compared with an average of closer to five in private equity. This places listed companies at a comparative disadvantage in terms of the efficiency of their capital structures.  Three years ago the interest margin on a five year loan for a triple B credit rated company would cost around 90 basis points on LIBOR and a similar loan today would cost approximately 60 basis points, a reduction of a third. For many companies there is still the opportunity to take advantage of attractive funding conditions to improve capital structures and fund pension deficits, which currently stand at £85 billion for the FTSE 100.”

Key findings:

• The corporate market should be taking advantage of the opportunity to lower the average cost of capital;
• The public market does not have the same incentive as private equity to manage the use of debt aggressively at favourable points in the cycle;
• The corporate market is missing out on the opportunity to refinance cheaply, fund transactions or plug pensions deficits with cheap debt.

On the flip side of the coin, however, the research has shown that while new complex debt instruments have brought increased liquidity to the market, there are potentially dramatic fall-out consequences where highly leveraged businesses do not meet expected growth.

Gerry Loftus, Reorganisation Services Partner at Deloitte, commented: “The increased trading of complex debt instruments, particularly in the last two years, has made restructuring a much more difficult task. In some cases, complexity may create a bar to restructuring. There are an increasingly large range of ‘faceless’ creditors who may well have differing motives when a business is in distress. This can be especially difficult for the management of the business if, for example, some of the creditors want to pursue a quick exit rather than a longer-term rescue strategy. While recent insolvency legislation has encouraged a ‘rescue culture’, we predict that some good businesses that do not meet growth expectations will face increasing difficulties in resolving finance structure issues.”

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Ends

Notes to editors
About the research:
Deloitte interviewed key players from major private equity houses, major banks, FTSE 100 board members, academics, ratings agencies and economic advisors.  The research investigated views on debt levels, past and present market situations, future forecasts, personal experiences and viewpoints to gain an understanding of the UK and European debt markets.

About the Corporate Finance Practice at Deloitte
Deloitte offers the broadest range of M&A services in the market.  Our offering is made up of advisory, transaction services, restructuring and turnaround, operational improvement, sustainable working capital reduction, fund placement advisory, debt advisory, real estate, M&A tax, valuation, sale and purchase agreements, business modelling, post-merger integration and fraud investigations. Our due diligence expertise covers all aspects of finance, tax, commercial, integrity, operations, market strategy, IT, pensions, people and environmental and is the broadest in the market.

About Deloitte
In this press release references to Deloitte are references to Deloitte & Touche LLP which is among the country’s leading professional services firms, providing audit, tax, consulting and corporate finance services through more than 9,000 people in 21 locations. Known as an employer of choice for innovative human resources programmes, it is dedicated to helping its clients and its people excel. Deloitte & Touche LLP is the United Kingdom member firm of Deloitte Touche Tohmatsu (‘DTT’), a Swiss Verein whose member firms are separate and independent legal entities. Neither DTT nor any of its member firms has any liability for each other’s acts or omissions. Services are provided by member firms or their subsidiaries and not by DTT. Deloitte & Touche LLP is authorised and regulated by the Financial Services Authority. The information contained in this press release is correct at the time of going to press.