Future Retirement Success
  • Politics
  • Business
  • Investing
  • Stocks
  • Politics
  • Business
  • Investing
  • Stocks

Future Retirement Success

Business

Debt Defaults Due to Higher Interest Rates Could Harm Economy, Warns Bank of England

by June 28, 2024
June 28, 2024
Debt Defaults Due to Higher Interest Rates Could Harm Economy, Warns Bank of England

The Bank of England has issued a warning that the UK economy could suffer if higher interest rates lead private equity-backed companies to default on their debts.

In its latest financial stability report, the central bank highlighted the significant risk posed by the jump in borrowing costs since late 2021.

Private equity-backed businesses account for around 5% of UK private sector revenues and employ about 10% of the UK private sector workforce, which includes over two million employees. The report warns that companies might cut investments or reduce employment after their private equity financiers refinance their debts at higher interest rates.

“The widespread use of leverage within private equity firms and their portfolio companies makes them particularly exposed to tighter financing conditions,” stated the Bank of England in its biannual report.

Recent years have seen several prominent British companies acquired by private equity firms, including Morrisons, which was bought by Clayton, Dubilier & Rice for £7 billion in 2021, and Hargreaves Lansdown, currently in talks with CVC Capital Partners for a potential £5.4 billion deal.

The report also noted that 25% of all debt maturing in risky credit markets over the next five years originates from private equity-backed companies. The central bank urged private equity firms to disclose more information about the size and quality of their assets.

The Bank of England’s investigation into the sector concluded that losses on loans could impact the UK banking system, which has increased lending to private equity firms. This could result in higher borrowing costs for businesses if private equity-backed companies fail to repay their debts, potentially damaging the real economy.

Such a scenario might “reduce investor confidence,” the Bank warned, further increasing financial pressure on businesses and leading to higher borrowing costs.

Interest rates have risen to 5.25%, a 16-year high, from a record low of 0.1%. The private equity industry has expanded significantly during this period of low borrowing costs, growing from $2 trillion in assets in 2013 to $8 trillion today.

Michael Moore, CEO of the British Private Equity and Venture Capital Association, acknowledged the Bank’s concerns but emphasized the industry’s long-term stability and resilience. He noted that many of the Bank’s issues are already being addressed by new regulatory activities from the Financial Conduct Authority.

Meanwhile, the Labour Party has pledged to eliminate a tax rule that allows private equity executives to limit their tax bills if it wins the general election on July 4. Currently, private equity executives benefit from “carried interest” being taxed at the capital gains tax rate of 28%, rather than the combined income tax and national insurance rate of 47%. Labour plans to tax carried interest at the higher rate, addressing a tax break estimated to be worth £4 billion under the current system.

Read more:
Debt Defaults Due to Higher Interest Rates Could Harm Economy, Warns Bank of England

0
FacebookTwitterGoogle +Pinterest
previous post
How to Choose the Right Electric Bicycle
next post
Amazon Sued for £2.7bn by UK Third-Party Sellers Over Anticompetitive Practices

You may also like

The Body Shop Announces Closure of Nearly Half...

February 20, 2024

Safety check: 5 reasons to focus on duty...

September 22, 2022

King’s Coronation to give UK SMEs a £180m...

May 3, 2023

Best Winter Daytrips from Harlow

December 11, 2024

King Charles urged to use his reign to...

May 1, 2023

Apple to put USB-C connectors in iPhones to...

October 27, 2022

Man Arrested in Ongoing Criminal Probe into PPE...

June 13, 2024

Frasers blocks Boohoo name change to Debenhams amid...

March 29, 2025

Hycondo Thasala Chiang Mai: FIABCI-Thai Prix D’Excellence Grant...

February 14, 2023

Getting to Know You: Warren Mead, CEO of...

August 1, 2024

    Get free access to all of the retirement secrets and income strategies from our experts! or Join The Exclusive Subscription Today And Get the Premium Articles Acess for Free

    By opting in you agree to receive emails from us and our affiliates. Your information is secure and your privacy is protected.

    Recent Posts

    • “YouTube is future-proofing itself”: leading producer backs AI crackdown to protect creative jobs

      August 7, 2025
    • Horizon victim Lee Castleton sues Post Office and Fujitsu for £4.5m in landmark legal claim

      August 7, 2025
    • Bank of England expected to cut interest rates to 4% amid weakening UK economy

      August 7, 2025
    • OpenAI in talks over $500bn share sale, potentially surpassing SpaceX in value

      August 7, 2025
    • UK construction activity slumps to lowest level since Covid amid housing slowdown

      August 7, 2025
    • Getting to Know You: Stuart Davis, CEO & co-founder, Dubs Universe

      August 7, 2025

    Categories

    • Business (8,698)
    • Investing (2,179)
    • Politics (16,329)
    • Stocks (3,228)
    • About us
    • Privacy Policy
    • Terms & Conditions

    Disclaimer: futureretirementsuccess.com, its managers, its employees, and assigns (collectively “The Company”) do not make any guarantee or warranty about what is advertised above. Information provided by this website is for research purposes only and should not be considered as personalized financial advice. The Company is not affiliated with, nor does it receive compensation from, any specific security. The Company is not registered or licensed by any governing body in any jurisdiction to give investing advice or provide investment recommendation. Any investments recommended here should be taken into consideration only after consulting with your investment advisor and after reviewing the prospectus or financial statements of the company.

    Copyright © 2025 futureretirementsuccess.com | All Rights Reserved