Corporate Britain is feeling the heat of rising interest rates – and it’s going to get tougher

Corporate Britain is bleeding. Over the past few days alone three of Britain’s biggest household names have shown just how deeply higher interest rates are biting into profits while the number of firms issuing profit warnings is on the rise. 

Until now the spotlight has been on the huge leap in mortgage costs for homeowners triggered by the highest interest rates in 15 years. But now we are seeing first hand how more expensive borrowing is working its way down to the weeds of the economy, affecting not only the demand for new homes but also building materials and retailers selling even the cheapest of cleaning products. 

First to kick-off with the gloomy news this week was Travis Perkins, the building materials giant, which reported profits falling by almost a third in the six months to June. It’s the country’s biggest supplier of building materials – and also owns the Toolstation chain – so it’s a good barometer for what’s going on in the construction sector. Not a lot is the answer. 

Then came Taylor Wimpey, one of the country’s biggest house builders, revealing that first-half profits had collapsed by nearly a third to £238 million because demand for new homes has fallen so sharply. So it was no surprise when Nationwide’s latest survey showed house prices have dropped at the sharpest rate for 14 years.

More pertinently, perhaps, nearly a third of those who did buy Taylor Wimpey homes took on mortgage terms of more than 36 years compared to just 7 per cent two years ago. That’s a serious jump. 

The latest casualty is Wilko, the cheap and cheerful household to garden products retailer which advertises with the slogan: “Find your little wins with Wilko.” Well, Wilko has found itself with its own little loss: it is close to appointing administrators to oversee the sale of the business which could put 400 stores and 12,000 jobs at risk. 

The Wilko situation is a more complicated one as the retailer is not simply a victim of tougher trading conditions or recent higher interest rates. Family-owned by the Wilkinsons, who started out in the 1930s, Wilko has been attempting to rejig the business for some time now after borrowing £40m from the restructuring specialist Hilco last year. Despite cutting jobs and bringing in an outsider to run the business, Wilko is running out of cash. 

Yet only last November, the Wilkinson family took out nearly £3 million in dividends for the previous year. Despite sales of £1.3 billion, it had still fallen into the red. 

From the outside, Wilko looks to have suffered from the twin pincers of being badly run and overloading itself with debt. What this latest move does though, is to give Wilko a breathing space of 10 more days to come up with a rescue deal which is important as it gives the company a chance to rescue thousands of jobs. 

What Wilko also shows is the danger of overloading with cheap debt as so many companies have done since interest rates were slashed to zero after the 2008 financial crash. And now they are suffering from the pain of more realistic interest rates. 

It’s the end of an era: a minimum of 5 percent base rate is the new normal, for now at least, and companies are going to have to adjust fast or collapse. And it’s not in the least surprising. Andy Haldane, former Bank of England chief economist and now head of the Royal Society of Arts, has been warning for years that the UK’s long-running productivity gap with the rest of the world is partly due the long tail of highly indebted zombie companies. 

Even the glory days of the new masters of the universe – the private equity financiers – are well and truly over. They at least are big enough to admit it too. The boss of Apollo, Marc Rowan, was refreshingly honest in his interview with the Financial Times yesterday, saying that a decade of money printing, low interest rates and fiscal stimulus which had fired up demand was now in retreat. 

The question now is how big will the corporate shake-out be? Potentially explosive. Recent research from EY-Parthenon partner, Samantha Keen, in charge of UK restructuring, reported that company insolvencies reached over 6,300 for the first time since 2009 in the second quarter as businesses struggled to cope with pressures from higher rates, higher inflation and lower growth. And the number of Creditors’ Voluntary Liquidations (CVLs) rose 67% year-on-year.

Other research from EY-Parthenon showed that nearly one-in-five of the UK’s listed companies have issued a profit warning in the last 12 months, with a fifth citing tighter credit conditions. That’s the highest level since 2008. The impact of rising interest rates was cited in one-in-five warnings in the second quarter while the housing market slowdown was the reason for one-in-seven warnings. The red lights from the construction sector were at the highest level in three years. 

And it’s going to get tougher: insolvency activity typically peaks nine to twelve months after a profit warning. You can see just how tough it is going to get from the by now daily reports of gloom from all corners: the British Retail Consortium earlier this week said that 13.9% of high street shops are unoccupied while vacancies have reached “critical levels” in all locations. Springboard, the retail analysts, report the number of people heading to the shops fell for the first time for 14 years last month as the UK faced one of the wettest July’s on record. 

The downturn has been even worse for our already run-down seaside towns with footfall down by 4.6%, as the torrential rain and wind kept people away from beaches.

It’s hard to muster up much sympathy for the private equity barons who have run out of cheap fuel or even for the thousands of zombie businesses that have been kept going on cheap debt. 

The far more disturbing impact of higher rates is the burden being placed on the self-employed and the 5.5 million or so of the UK’s smaller companies, a proportion of which are the source of most of the country’s jobs and future growth.

These are the ones which are being walloped the worst, with the cost of finance rising sharply just as demand is slowing down. Yet it’s also the one area of the economy where the government – committed to halving inflation and backing the Bank of England’s latest rate rises – could introduce practical measures to help stop the bleeding. Clamping down on late payments, extending business rates relief and raising the VAT threshold would all be relatively cheap things to do if the government were serious about tackling productivity and encouraging growth. And if it doesn’t help by introducing such simple measures, why not? 

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