EY warning: Higher interest rates could cost UK firms £25bn over next three years
Higher interest rates means UK firms are set to face an extra £25bn bill on their annual debt servicing costs, according to new projections from EY.
The consultancy found that the cost of debt refinancing has picked up by three to six percentage points since the beginning of last year, putting extra strain on businesses rolling over debt.
EY suggested that between 2024 and 2027, £500bn of private and corporate debt will need to be refinanced by UK listed companies.
In 2024 alone, over £100bn will need to be refinanced.
Given the increase in interest rates, firms will face an extra £20-25bn in annual debt service costs over the next three years, EY said.
Luke Reeve, partner and head of debt advisory at EY, said the adjustment will be “untenable” for some.
Thousands of businesses have struggled with rising interest rates, which have risen rapidly from near-zero to a post-financial crisis high of 5.25 per cent.
Although rates are likely to start falling soon, new debt will still be much more expensive than it was just a couple of years ago.
Last year around 25,000 businesses went into insolvency, a thirty-year high. Forecasts out earlier this week from the Centre for Economics and Business Research (CEBR) suggested as many as 33,000 firms could go bust this year.
“As the UK emerged from the pandemic, there was optimism around the long-term economic outlook fuelled by a rebound in GDP and a buoyant deals market where finance was, in many cases, raised on expectations of continued economic growth and stable price levels,” Mats Persson, partner at EY-Parthenon, said.
“However, a combination of higher financing costs, challenging trading conditions and discount rates means a valuation gap is now emerging,” Persson continued.
A valuation gap reflects the difference between the market value of a firm and what investors think it is worth.