Anxiety mounts as clock ticks away on Britain’s £530bn debt timebomb

Of course, the government is not about to pull the rug from under the banks after going to such trouble to save them. Nevertheless, the refinancing clock is ticking.

The impending turmoil can be sensed far beyond the banking industry. Debt is a legacy of the boom years, when many companies in Britain and beyond lived on borrowed money to fund takeovers and windfall payments to shareholders. Private-equity firms, meanwhile, piled on record amounts of debt to fuel their deal bonanza.

Businesses ranging from Thomas Cook, the tour operator, to Bovis Homes, the housebuilder, and Enterprise Inns and JD Wetherspoon, the pub groups, have debt to refinance in the next few months.

That's just the tip of the iceberg. Guy Hands, the private equity guru, estimates that as much as £4.2 trillion of loans will fall due for renewal over the next five years in Europe and America. That is equivalent to almost three times the annual output of the British economy.

In the UK alone, some £530 billion of debt is due to be refinanced by 2015, according to data provided by Thomson Reuters. Even once the huge volumes of debt issued by banks are stripped out of the equation, corporate Britain has to find about £180 billion over the same period. That is enough to run the National Health Service for 21 months. It is also roughly twice as much as has resulted from equity fundraisings in the London market this year, despite the enormous share issues by Lloyds Banking Group, HSBC and Rio Tinto.

Unless those loans can somehow be replaced, hundreds more companies will go bust, thousands more jobs will be lost and the green shoots of economic recovery will be trampled into the ground. Even where the finance can be extended, companies could be saddled with tough new terms that force them into savage cost-cutting plans to stay alive.

"We have a huge ticking timebomb consisting of lots of little explosions that occur every day and are slipping under the radar," said Hands. "The UK and the US are likely to end up with stagflation, with the real human cost being a lost generation who will not find the jobs they have the skills to do."

A report from Standard & Poor's, the credit-rating agency, warns that large budget deficits will claim the lion's share of available finance, leaving many private sector borrowers in limbo.

"The current financial environment encourages financial institutions to restructure their balance sheets by buying a much larger proportion of sovereign bonds," said Jean-Michel Six, Standard & Poor's chief economist for Europe. "This provides help to governments as they finance their growing debt.

"However, such action leaves aside a significant part of the economy, which raises the question of who is going to underwrite economic growth in the coming years."

Mervyn King, the Bank of England governor, told members of the Commons Treasury committee that Britain faced "profound challenges" in the upturn. "Powerful forces are continuing to restrain spending in the economy," he said. "Banks are actively trying to reduce their leverage. There is a long way to go in that process and, while it is continuing, the availability of credit to households and companies will be impaired. That, combined with uncertainty about incomes and profits, will make households and companies reluctant to spend."

IN early July, almost 600 bankers crammed into Gibson Hall in the City of London to see a presentation from Jim Ratcliffe, the chemicals tycoon who was, until recently, one of Britain's 10 richest people.

Ineos, the group he built through a series of leveraged acquisitions, had grown into one of Britain's biggest private companies and the world's third-largest chemicals firm. After a huge drop in profits, however, the company's £6.4 billion debt pile had become too much of a burden.

Ratcliffe had called the meeting to talk the City through the new finance structure he had just agreed with the 230 banks that had bankrolled his expansion.

In exchange for much higher interest charges and a £57m arrangement fee, the banks had agreed to reset all the covenants on the group's loans. The new annual interest bill, however, amounts to about two-thirds of the group's forecast profits.

Dozens of other businesses have been forced into similar debt negotiations. While Ineos is likely to bounce back as raw-material prices stabilise, others face a more uncertain future.

Restructuring experts have started to talk about a phenomenon called "pretend and extend". With banks still nursing badly wounded balance sheets, they are reluctant to admit to bad debts unless it is absolutely necessary. Rather than writing off bad loans and restructuring companies on a more sustainable footing, the banks are extending more credit or delaying repayment, and pretending that everything will be fine.

"In a lot of cases they are restructuring companies but still leaving them with as much debt as they can afford to service," said Anthony Brennan, head of debt advisory at KBC Peel Hunt. "Although the banks buy time through this process, by deferring the pain, the underlying restructured business will end up using all its cash to pay interest on its debt."

The ranks of so-called "zombie" companies are swelling by the day. Crest Nicholson and McCarthy & Stone, the housebuilders that were previously backed by HBOS, are being tarred with this brush by restructuring experts.

"What we need to see is companies being properly restructured to maximise value and appropriate capital structures put in place, or the company shut down completely," said Frits Prakke, managing director of Alchemy Special Opportunities. "Losses should be crystallised as soon as possible."

Rather than waiting for a crisis, dozens of big companies have been tackling their future funding problems head-on. Tate & Lyle, the sugar producer, recently bought back £100m of bonds that weren't due to mature until 2012. It financed the move by issuing 10-year bonds. Other giants such as Imperial Tobacco and Marks & Spencer have orchestrated similar moves, raising billions between them.

"If you go back to this time last year, at the height of the credit crunch, there was a real concern about how to refinance debt," said Mark Lewellen, head of European corporate origination at Barclays Capital. "The good news is that over the past 12 months we have seen the busiest period for corporate debt issuance in Europe."

Fund managers have been flush with cash since the Bank of England started buying bonds this year. With interest rates close to zero, there has been little appetite to buy government bonds. Buying corporate debt has become an attractive investment simply because it is one of the few ways of getting a return.

David Currie, head of investment banking at Investec, said: "We are at a crossroads in the markets. There are all the private-equity deals from the peak of the market to refinance. Businesses were geared by eight, nine or even 10 times earnings. People will be willing to put up with that for a while and will roll over chunks of the debt but eventually something has to give."