Risks around the amount of debt at Rolls-Royce Holdings PLC (LSE:RR.), JD Wetherspoon PLC (LSE:JDW) and Marston’s PLC (AIM:MARS) have been flagged as central banks rapidly hike interest rates.
With the Bank of England having lifted rates from near zero in December to 2.25% last month and the US Federal Reserve putting the pedal to the metal from the record low of 0.25% all the way to 3.25%, the cost of refinancing debt has increased materially.
Financial markets are currently pricing in BoE rates rising to a peak of around 5.5% next year, with US rates seen peaking below 5%.
The problems for companies are not just that interest costs are rising, broker Canaccord Genuity (TSX:CF, LSE:CF) warned, there is also “less of it to go around”.
After fielding a stream of clients asking about companies with high debt and the impact of the rising cost of debt, Canaccord has screened for London’s most debt-laden names.
Using Canaccord’s Quest tool, the analysts looked at the highest levels of debt, including leases as per IFRS 16 accounting standards, which are abundant in the retail, hospitality and transport sectors.
As well as Rolls, Wetherspoon and Marston’s, the screen also highlighted Dignity (LSE:DTY) PLC, Spire Healthcare Group Plc (LSE:SPI), John Wood Group PLC.
Quest estimated Wetherspoon has a debt to earnings figure of 8.6 times, though the company has fixed its base rates at just over 1% until November 2031.
While Marston’s has set a target of reducing its debt below £1bn, its latest results showed net debt close to £1.25bn, including securitised debt of £679mln that matures in 2035 and is fully hedged.
Spoons has been selling some of its pubs this year and analysts at Liberum recently put out a note flagging high leverage of £1.4bn and that debt covenants were waived until October 2022. Analysts said they “believe further waivers will be required and expect an update on this at the prelims”, which are due this Friday.
As for Rolls, it reported net debt of £5.14bn at its August interims, but upon completion of the sale of ITP Aero last month the engine maker said it would use much of the €1.6bn proceeds to pay down debt.
Boss Warren East said reducing debt was one of his priorities, as the expects to return to break-even on a cashflow level this year after the pandemic lull.
Canaccord estimated Rolls’s debt to earnings ratio at 4.0 times, though in its results the company noted it has access to £7.3bn of liquidity, including £2.8bn in cash, with “no significant debt maturities before 2024”.
A simple screen of debt to earnings of FTSE companies also flags Capital & Counties Properties PLC (LSE:CAPC) (23 times), Energean PLC (LSE:ENOG) (12 times), Mitchells & Butlers PLC (LSE:MAB) (10.8x), Hammerson PLC (LSE:HMSO) (10.7x), CLS Holdings Plc (LSE:CLI) (7.9x), Whitbread PLC (LSE:WTB) (7.4x), WH Smith PLC (LSE:SMWH) (7.4x)) and National Grid PLC (LSE:NG.) (7.4x).
Screening for debt to market cap, among the top of the list is British Airways owner International Consolidated Airlines Group SA (LSE:IAG) (£11.7bn net debt versus a market cap of £5bn), Vodafone Group PLC (LSE:VOD) (€41.6bn of net debt versus £28.4bn market cap), J Sainsbury PLC (LSE:SBRY) (£6.6bn debt and £4.2bn market cap) and BT Group PLC (LSE:BT.A) (£18bn net debt and £12.85bn market cap).