Debt becomes clearer following credit crunch

YORKSHIRE'S business community is moving towards more traditional and transparent debt structures as a consequence of the global credit crunch, reports new research.

According to the latest debt confidence service from professional services firm Deloitte, many business professionals across the UK believe the "good times" of liquid debt markets and the ready availability of cheap credit and loose covenant packages which has fuelled an unprecedented leveraged buyout boom has come to an end.

Respondents said in order to get the UK's financial system running smoothly again following the credit crunch, which brought the credit markets to a sudden halt as a consequence of defaults in the US sub-prime mortgage lending sector, there was a need to return to simpler debt structures.

Gerry Loftus, reorganisation partner at Deloitte, said: "After a long period of low credit spreads and high liquidity levels, the opportunity for companies to refinance on better terms has now disappeared. Over the next few months the deal flow should return, but transactions will be done with simpler structures, tighter covenants and at higher pricing, much like leveraged transactions that were done in 2003 to 2004."

While 86% of respondents believe the easy flow of credit has come to an end, 94% of those surveyed from the private equity sector held this view.

Almost three-quarters (72%) of respondents believe that credit spreads will increase compared to 53% in last year's survey, while 84% of respondents believe that covenant packages will tighten compared to 39% last year.

The role of hedge funds in private equity transactions were also highlighted, with 68% of respondents believing their role will decrease or stay the same.

Deloitte said draining confidence in the debt markets was also contributing to the closure of finance structures such as Structured Investment Vehicles (SIVs).

It also said the survey revealed that Asian financial institutions appeared less exposed to the negative ramifications of the credit crunch and that this could help the UK's position as a global financial centre, continuing to attract investment.

Deloitte interviewed key players from major private equity houses, major banks, board members, academics, ratings agencies and economic advisers for the survey.