Era of cheap credit has ended

We look at the growing focus on the nation's debt problems fuelled by the recent Northern Rock furore

Eddie Pacey

Rumblings from the US credit crunch and the high-profile case of the run on Northern Rock have received much publicity. Concerns have also been raised on the rising tide of debt, specifically debt involving private equity that has funded a multitude of mergers and acquisitions or leveraged buyouts. Our own sector has seen quite a bit of this.

The Treasury Select Committee went as far as to suggest the massive levels of debt could create a wider risk to the economy should deals of this nature result in a growing level of failure or risk of collapse. There is no doubt, cheap debt, low interest rates and the willingness of investment banks to borrow and lend big chunks of money to private equity firms helped fuel the process.

Coming off the back of five interest rate hikes by the Bank of England in less than a year, recent events will undoubtedly reduce the ability to service loan and interest repayment on the debt created.

At times of cheap borrowing it is easy to understand the attraction of debt as a means of allowing investors to see a favourable return on lower levels of direct cash put into a business. The return created on sometimes massive levels of debt was certainly worth the risk.

If there has been a failing, perhaps it is that the availability of cheap credit has clouded the judgement of many, resulting in less caution and due diligence when picking investment targets.

The credit crunch may mean private equity investors have to sit tight and wait longer than expected to see a return and those they borrowed from will undoubtedly have to consider higher levels of write off.

The rate of consolidation seen in the IT sector in recent months may also slow. This may not necessarily be a bad thing because it will allow time for the dust to settle following the feverish activity.

A downside is that it may lead to a more cautious approach to borrowing and lending. But credit within the channel is not given lightly and, thankfully, current levels have more than ample headroom to continue financing the channel as it always has.