Debt-riddled firms rocked by rising interest rates: Cineworld sounds alarm as Bank of England hikes borrowing costs for third time in three months
Rising interest rates are piling pressure on heavily indebted companies as the cost of servicing their borrowing soars.
The Bank of England raised interest rates yesterday to 0.75 per cent in its third increase in three months as it steps up its battle against inflation.
The move came just hours after the Federal Reserve raised rates in the US for the first time in three years.
Inflation fight: The Bank of England raised interest rates yesterday to 0.75 per cent in its third increase in three months as it steps up its battle against inflation.
And as inflation spirals, further rate hikes are likely on both sides of the Atlantic. That spells bad news for companies struggling under the weight of their debts.
In a bleak update yesterday, cinema chain Cineworld warned there was ‘material uncertainty’ over its ability to pay down its debts.
Many firms took on significant amounts of debt to survive the pandemic, and rate rises from central banks will increase the cost of servicing and refinancing those loans.
The Federation of Small Businesses, which lobbies on behalf of 5.8m companies in the UK, said rising rates will add to the burden of firms who took on debt during the pandemic.
It called for Government support for indebted firms, arguing the rise will hamstring their recovery from the pandemic.
FSB chairman Martin McTague said: ‘This move will mean higher debt costs for many firms at a moment when soaring overheads are threatening futures.
‘The economic consequences of the pandemic are still being felt by small businesses, whose ability to make up for lost time and income has been undermined by a vicious cycle of rising costs.’
And AJ Bell investment director Russ Mould said: ‘If you’ve got a lot of debt and your interest rates go up, your interest bills are going to go up too.’
He pointed to some of the most indebted firms listed in London that might struggle with rising interest rates including British Airways-owner IAG, Tui and Cineworld.
Balancing act: Bank of England governor Andrew Bailey
Cineworld, the world’s second biggest cinema chain, has seen its debt pile balloon throughout the pandemic to £3.7billion.
In 2021 it added a further £374million to its debt and it warned yesterday the cost of servicing the borrowing was increasing.
The chain, with 751 cinemas around the world, said there was ‘material uncertainty’ around whether it will be able to pay off its debts. Mould said: ‘Cineworld, IAG and Tui are all sensitive to the economy.
They’re all hoping to come out of lockdowns and start earning and taking bookings and learning very quickly.
‘But they’ve all the other things to think about, like rising fuel bills at the travel companies.’
Mould said interest rate rises could indicate a strong economy, which would see the companies’ profit growth outstripping the rising cost of their debts.
He said this could potentially see shares in the companies soar, but added ‘if things go wrong, this could be the opposite’.
Cineworld chief executive Mooky Greidinger said he was ‘not worried’ about the company being able to keep up with its debt repayments.
He said: ‘The main story is that we are getting back on track.’
Tui, the world’s biggest travel agent, said it cut its debt pile in 2021, but it still stands at £4.2billion. Meanwhile IAG took on an additional £1.6billion debt in 2021, taking its total debt pile to £10billion.
Peel Hunt industrials analyst Henry Carver said for global companies with debt around the world the rate hike would pose less of a threat.
Carver said the rising rates would raise the amount firms have to pay back and could cause a ‘knock’ for some, especially those with large debt piles.
He said: ‘A rate rise in the UK is clearly not helpful, but it is not game changing.’
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