Bank of England staff paper estimates tighter borrowing constraints for UK firms with higher intangible capital

The Bank of England published Staff Working Paper No. 1,132 presenting a structural approach to identify firm-level borrowing constraints from the relationship between interest rate spreads and firms’ capital-to-debt ratios, and applying it to UK firms to test whether intangible assets ease debt-market frictions as effectively as tangible collateral. The results point to tighter debt financing conditions for firms with higher intangible intensity. Using a large panel of UK limited companies and default-risk proxies, the paper finds that interest rate spreads are less responsive to changes in capital-to-debt ratios for firms with more intangible assets, consistent with intangibles being less effective at mitigating borrowing frictions. Reduced-form estimates link a one standard deviation increase in intangible intensity to 49% lower debt volumes, a 62 basis point rise in financing costs and a 9 percentage point increase in the share of short-term debt. Structural estimates imply a one standard deviation increase in intangible intensity increases the firm interest rate by around 126 basis points for the average firm, with higher tangible capital lowering spreads while higher intangible capital is associated with higher spreads even after controlling for debt maturity and other firm characteristics. The paper is published as research in progress to elicit comments and does not represent Bank of England policy.