"Our research shows over a third of UK sound equipment companies are in more debt than they have been at any time in their history," says David Pattison, senior analyst at Plimsoll. "Rising rates are a useful wake-up call. Many of the companies in question have been enticed by low interest rates and the lure of easy debt secured on rapidly rising property prices, and so have been able to cover up flaws in their business strategies - effectively buying time. There is just enough time left for these firms to look seriously at their balance sheets and change direction."
If companies reduce their level of debt and streamline their business models, they may have a future, according to Plimsoll. But if they ignore the alarm call they risk sleepwalking into danger.
Plimsoll, which has conducted independent assessments of private and publicly quoted companies for the past 20 years, has an established track record of spotting the warning signs for businesses. Nearly nine out of 10 failed companies in the UK had earned a "danger" or "caution" rating from Plimsoll in the two years before their demise.
Rising rates should also bring stability to the UK sound equipment market, according to Pattison, because they will slow down the pace of acquisition activity. While this is unlikely to affect deals already on the table, companies with some money in the bank will probably leave it there, in the shorter term at least. This may be bad news for smaller firms hoping to sell out to the bigger players, but it's good news for those fearing a hostile takeover.
The companies in the danger zone, however, may see themselves joining a wave of high profile distress sales as the banks tighten their books - unless they take action now, before the Bank of England announces further rises.
"There's another reason for reducing outgoings, of course, and that's the fact that wage demands will start to increase to keep pace with dearer borrowing," says Pattison. "While the Bank of England itself says that rising interest rates can take up to two years to exert their full impact, employees paying their mortgages are usually the first to feel the strain. The other side of that coin, however, is that company growth should not be badly affected in the short term, allowing last year's sales figures to be matched or beaten."
(Jim Evans)
