As Covid hit Britain, debt markets shuddered to a near standstill.
Corporate bond yields - akin to the effective interest rate a bank would charge a company for a loan - steepled as investors scrambled to offload debts at the end of March 2020, amid fears a raft of companies would default on their loans.
Rebounding in the months that followed, yields have been on a steady path skywards since the end of December. Yields are now higher than they were at the start of the pandemic.
What that means is debt markets are more freaked now than they ever were during the last two and a bit years. Surging interest rates are bringing the great private equity boom to a crashing halt, following a string of major British businesses that were sold off the stock market, including Asda and Talktalk.
The parlous state of corporate debt markets was brought sharply into focus last Tuesday as the sale of Britain’s best-known chemist chain, Boots, collapsed.
Wall Street buyout fund Apollo and Indian billionaire Mukesh Ambani were simply not able to match the price wanted by Stefano Pessina, the chairman of Boots’ parent company Walgreens.
Having taken control of the business in a deal worth £9bn in 2014, and selling off some parts of it, Pessina initially demanded a £7bn price tag for Boots when it went up for sale last December. The £5bn offer reportedly tabled by Ambani was never going to be enough - despite being considerably more than others.
In part, there was a fundamental difference of opinion between vendor and buyer in terms of price. But City sources add that the effective closure of debt markets to private equity was undoubtedly also a factor.
This was the element that Pessina and the rest of the Walgreens board decided to focus on. Bidders had struggled to arrange bank loans to buy Boots after financial markets “suffered unexpected and dramatic change”, the company said.
The private equity industry is facing a threat on several fronts. Nils Rode, chief investment officer at Schroders Capital, said last week that during the pandemic firms were boosted by buoyant asset markets, cheap borrowing costs, a booming IPO market and insatiable demand from investors for anything with a good story behind.
But now, he said, “every single one of these drivers has gone into a hard reverse”.
Rode added: “Inflation is heading towards double digits in many developed economies, levels not seen for several decades. Interest rates are rising, the IPO market has all but jammed shut, and growth and technology stocks are being hammered.”
Investment banking sources say they have been worried for several weeks about tightening debt markets as central banks reversed more than a decade of ultra-low interest rates.
Soaring inflation - referred to as “hyperinflation” in pockets of the City - sparked the likes of Bank of England Governor Andrew Bailey into action. With further interest rate rises on the cards, many in the City have decided now is the time to go on an extended summer holiday and assess the situation in September.
This has not just caused a headache for Walgreens.
FTSE 250 gambling group 888 Holdings, for instance, was forced to chip in at the agreed price to buy William Hill’s operations outside of the US earlier this year.
Analysts from Fitch were wary of the debt funding the £2bn deal. “We forecast 888's pro-forma profitability to be lower than that of close peers, Flutter Entertainment and Entain, and to be under pressure from high interest expenses,” they wrote.
Then there is a question of “what next” for the billionaire Issa brothers. The Asda owners began exploring sale options for EG Group, their petrol forecourt empire, several months ago.
“They can’t do a petrol station deal,” says one senior retail figure. “With their debt so high, they are a lot less attractive than they were.”
Deal activity within Britain’s travel sector - touted to be a major beneficiary of the Covid staycation boom - has also ground to a halt.
The Canadian owners of Parkdean, the UK’s biggest caravan park operator, called off its £1.6bn sale earlier this month. "Given the current broader macroeconomic uncertainty, the board has decided to pause the process and will revisit when the macroeconomic backdrop has improved," a spokesman for the company said.
Meanwhile, City sources said the sale of Butlin’s, the holiday park that provided the inspiration for BBC sitcom Hi-de-Hi!, was also close to collapse.
Owner Bourne Leisure, the company behind the Haven and Warner Hotels chains had hoped to fetch £600m from the sale. One deal insider said Bourne had failed to receive any bids that matched the asking price.
Meanwhile, the new owners of Morrisons have been left in a pickle. US buyout fund Clayton, Dubilier & Rice (CD&R) emerged victorious last autumn in the £10bn auction for Britain’s fourth biggest supermarket chain.
CD&R delayed plans to raise £6.6bn of debt in December to repay banks that funded its takeover bid. At the time fears over uncertainty surrounding the omicron variant were blamed.
In February lenders holding £1.2bn of Morrisons' riskiest debts were forced to sell them at a 20pc discount to the Canada Pension Plan Investment Board, which one senior lender said sent "a chill down some people's backs".
At that time one lender said they would "sit on their exposure" for now in the hope that market conditions would improve. The opposite has happened.
City sources question whether we will see deal flow dry up completely - though buyout funds may have to look to alternative financing sources instead.
Last week social care provider Caretech agreed to a take-private deal by co-founders Haroon and Farouq Sheikh, worth £1.2bn. Although predominantly paid for in cash, the offer will include £258m of debt from THCP Advisory - part of Three Hills Capital, a private equity firm whose investments have included burger chain Byron and SEC Newgate, a public relations firm.
There is a “cold wind blowing through the City”, says one adviser, whose firm has seen a series of stock market flotations pulled and takeovers shelved.
As the economic storm clouds continue to darken, it seems inevitable that London’s previously thriving market is likely to get worse before it gets any better.