Bank of England warns higher rates could lead to corporate defaults

investmentweek.co.uk:

The share of non-financial UK companies under this stress — those with a low ratio of earnings to interest expenses — will rise from 45% in 2022 to 50% by the end of this year, the BoE said.

In a new post on the central bank's blog, it warned that higher debt servicing costs may lead to defaults or the need for firms to suddenly reduce investment and employment.

The share of non-financial UK companies under this stress — those with a low ratio of earnings to interest expenses — will rise from 45% in 2022 to 50% by the end of this year, according to the blog. This figure rose to 70% for medium-sized companies.

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The post said: «Higher interest rates are putting pressure on indebted corporates through higher debt servicing costs. Such pressure increases the likelihood of defaults on corporates' debt and may lead some firms to reduce investment and employment sharply. 

»Defaults can increase risks to financial stability directly through reducing lender resilience, while sharp reductions in investment and employment can indirectly affect financial stability by amplifying macroeconomic downturns."

The analysis compared statistics, such as low interest coverage ratio, to those seen during the global financial crisis and dotcom crash. 

While it noted that current vulnerabilities are below the peaks reached during those events, it added that the peak share of vulnerable corporates was relatively low during the GFC.

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It added: «Unlike households, corporates did not, in aggregate, enter the GFC in a particularly leveraged position, although they did face credit supply constraints in its