To say it’s been a turbulent time for the UK economy would be an understatement, with Britain’s decision to leave the European Union causing shockwaves throughout the financial sector. Following the Brexit outcome, the pound fell to its lowest level in more than 30 years and a number of ratings agencies downgraded the UK’s credit rating.
In an effort to mitigate the impact, the Bank of England recently announced a number of measures, carrying huge implications for both businesses and investors. Firstly, a 25 basis point cut in Bank Rate to 0.25% was issued (the first interest rate cut in 7 years), as well as the purchase of up to £10 billion of UK corporate bonds. Alongside this, an expansion of the asset purchase scheme for UK government bonds of £60 billion, taking the total stock of these asset purchases to £435 billion.
For companies hoping to raise cash, this can be seen as a positive move. Borrowing costs have tumbled and is causing a flurry of new funding rounds; for example, BMW recently secured a £600 million investment at an interest rate of 0.875%. Vodafone has also seen success, raising more than £1 billion in two separate deals for 33-year and 40-year debt. In the words of David Reitman, a partner in KPMG’s corporate finance team: “This is fantastically cheap money.”
However, for investors the situation is slightly more uncertain. The Bank of England’s quantitative easing programme has forced down the already negligible government-bond yields, with the objective of pumping money into the economy and incentivising investors to plump for riskier assets.
Corporate debt would normally seem to be the next sensible step on the ladder – accepted as a little riskier than government debt – but also offering slightly better rewards. However, investors are also facing problems here. These bonds are harder to come across, and while companies could issue many more of them, to provide low-cost capital for expansion, few are doing so. In addition, the expansion of the government’s quantitative easing scheme has meant that those looking to issue are gaining access to incredibly cheap rates that offer very little return for investors.
As a result, investors are being pushed towards ever riskier companies and funds. Some analysts have suggested that this will make investors scrutinise the kinds of businesses they are buying debt from, performing rigorous fundamental analyses. Yet, there’s also the concern that increasingly desperate investors will move towards ever less viable investments, which could have a damaging effect on their portfolio and finances.
While there may seem to be little hope on the horizon, there are other options out there. For example, UK mid-market debt still presents a strong option. Our latest bond issue with Upfront Car Finance PLC has demonstrated just this, returning both 9% and 20% for investors. Investors should continue to do their due diligence, and by doing so will find that yields are still available, even throughout this period of financial turbulence.