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Investors concerned as US, EU and UK raise interest rates

Thor Johnsen Digital 9.jpg

Infrastructure deals in the telecoms industry in the Western world are likely to be harder after a round of increases in interest rates in order to tackle inflation.

They started when the European Union’s European Central Bank (ECB) two weeks ago put its base rate up by 0.5 percentage points, saying inflation has already hit 8.6% a year.

They continued last week when the US Federal Reserve put its interest rate up 0.75 percentage points, its second rise in a row, taking rates to between 2.25% and 2.5%.

And yesterday the UK’s central bank, the Bank of England, said British inflation was already at 13%, so it increased its interest rate by 0.5 percentage points to 1.75%.

The US economy decreased by 1.6% in the first quarter of this year and another 0.9% in the second quarter, making this a recession by the common definition.

The EU interest rate is now at its highest for eight years, and it spent most of the period from 2015 until the last few weeks at either 0.25% or even 0%. Now it is heading sharply back up.

For most of the first decade of the century the ECB’s interest rate was 2% or more, even up to 4.75% for a period.

Thor Johnsen (pictured), head of digital infrastructure investment at UK-based Digital 9, which manages investments in Aqua Comms, Arqiva, Verne Global and others, said, speaking before this week’s Bank of England announcement: “It is definitely going to make it difficult for leveraged buyouts and for debt funded driven build programmes.”

Josh Snowhorn, CEO of US data centre project Quantum Loophole, said: “Quantum Loophole has no debt and no plans to lever up so we are not as sensitive to rates. However the PE [private equity] and infra funds are generally concerned about a contraction and their ability to generate returns.”

Snowhorn said: “Other than the dotcom bust I have seen nothing but up in our industry and as far as the scope we view things under at Quantum Loophole, the sector is shining for us.”

From the other side of the banking counter, Richard Lukaj, senior managing director of Bank Street, who has been involved in more than 200 deals worth over $100 billion, said: “It’s impossible to ignore the recent market volatility, which in part is being impacted by rising interest rates. As a result, we are seeing an increase in cost of capital and related return requirements for the near-term horizon, thus depressing valuations for shorter term public securities.”

He added: “In fact, given many long duration infrastructure investors are still underweight [in] digital infrastructure [that is, not invested to their maximum potential], we are still seeing examples of record M&A valuations in the private markets for certain platforms of scale.”

Johnsen said: “Overall we should see slightly lower multiples for buyouts – particularly less growth oriented businesses – but I would temper this comment though as interest in the sector remains very strong.”

Snowhorn commented: “Time will tell and certainly the weak players who are over levered [that is, borrowing too much] will suffer.”

Lukaj said: “While this macro environment is not easy to predict, we remain very constructive with our well-positioned clients to deliberately pursue their strategic and financial objectives, most notably those companies focused on wireless infrastructure, consumer and enterprise broadband fibre and data centre operators.”

Meanwhile, UK-based consumer consultant Uswitch warned about the inflationary pressure affecting telecoms operators and their customers. Broadband expert Ernest Doku of Uswitch said: “News that BT is to go ahead with next year’s hikes despite the cost-of-living crisis will come as a bitter blow to customers coping with other financial challenges.”

He added: “This early indication does at least give consumers time to prepare for potentially double-digit price rises in advance. If you are renewing your contract within the next year, it is worth bearing in mind that you will be facing a hefty increase when it comes into effect.”

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