The Big Four firm found that the cost of debt financing has increased on average by 3% to 6% since January 2022.
Based on its projections, between 2024 and 2027, £500bn of private and corporate debt will need to be refinanced by UK listed companies, costing an additional £20-25bn in annual debt service costs. In 2024 alone, it is projected that over £100bn will need to be refinanced.
EY also warned there could be a “significant” valuation gap, as softening demand and a higher cost of capital impacts the underlying value of a business. It said the divergence between investor value and real market value has the potential to weaken company and asset valuations, affecting both reporting and exit considerations.
“While rates are easing, the markets anticipate the cost of debt will be between 3 and 6 percentage points higher for the average company or even greater for more leveraged businesses, compared to only two years ago. This will require adjustment in capital structures and equity valuations which will affect all UK based companies and will be untenable for some.”
Mats Persson, partner at EY-Parthenon, said: “As the UK emerged from the pandemic, there was optimism around the long-term economic outlook fuelled by a rebound in GDP and a buoyant deals market where finance was, in many cases, raised on expectations of continued economic growth and stable price levels. However, a combination of higher financing costs, challenging trading conditions and discount rates means a valuation gap is now emerging.
“Whilst inflation is easing, companies should avoid relying on interest rates coming down quickly, particularly as ongoing geopolitical disruption and policy uncertainty due to elections in over 60 countries this year including the US, could lead to inflation and interest rate scenarios which are not fully priced in by markets.”
He added: “To protect their balance sheets, companies should be looking for opportunities to deleverage ahead of refinancing events and explore strategies to improve liquidity and access to working capital. It’s also critical that companies continually conduct stress tests and scenario plan to understand the resilience of their business and develop a strategy to mitigate risks.”