Debt fears stalk the High Street

BANKS and accountancy firms have been put on alert amid warnings that poor Christmas trading could push fragile businesses - including some well-known High Street names - over the edge.

The bleak picture emerged after warnings that cheap finance has encouraged many businesses to borrow too much. This leaves them increasingly vulnerable to collapse as consumer confidence, the engine driving the economy, weakens.

Predictions from company doctors - firms that specialise in rescuing ailing businesses - were given weight by the rush to slash prices in the run-up to Christmas in the hope of boosting sales. High Street spending is often an indication of things to come.

The problem has been made worse by the volume of private equity-backed deals in the past 12 months, some of which have involved piling on the debt.

Tom Lamb, head of Barclays Private Equity, said banks had enjoyed several highly profitable years lending freely, but 'there is always one deal too far'.

In the past year, private equity firms have been on a £20bn spending spree, fuelled by access to cheap borrowing. Private equity groups CVC and Permira topped the list of deals, spending £1.75bn on the AA, which they bought from Centrica. Company restructuring professionals are now concerned that some deals have left companies dangerously overstretched.

Andrew Wollasten, restructuring partner at Ernst & Young, said: 'The banks expect some of these to unwind and the root of this lies in the multiples of debt that have come into leveraged buyouts.

'Two years ago, three or four times debt to equity was fairly racy, but you are now seeing five or six times regularly. The last time they were up on these levels was in the Eighties.'

Figures from the Centre for Management Buy-Out Research show the level of debt involved in buyouts was almost 55% in 2004, the highest for a decade.

And according to Nick Hood, partner at restructuring specialist Begbies Traynor, this could have serious repercussions in a faltering economy. 'These private equity deals rely on benign interest rates,' he said. 'They are built on shifting sands.'

Another senior banker said the weak dollar had exacerbated the cracks that had begun to show in the past few months and that some companies would not be able to withstand the shock of falling consumer demand and the possibility of rising interest rates this year.

Tony Lomas, senior partner at accountant Pricewaterhouse-Coopers, said the first indicator of trouble was companies seeking waivers in the terms of their borrowings from banks, so-called banking covenants.

Though the pre-Christmas trading period is traditionally the time to renegotiate terms, he said he had already noticed more companies seeking waivers than in the past because of worries about underperformance.

The true picture will become clearer in the next few weeks as retailers start to update investors through regular trading statements.