Higher bond yields have investors wondering what companies will be prepared for a bit of extra strain on the balance sheet, and which ones could buckle under pressure. Based on AJ Bell analysis, some of the UK’s best-known names could face trouble.
When interest rates and bond yields were low, investors weren’t overly concerned with how much debt companies in their portfolios carried as debt servicing costs were manageable.
Today, the situation has changed dramatically as global bond yields have climbed to their highest levels in many years, creating a challenge for highly indebted companies.
On the other hand, those companies sitting on net cash are insulated from higher borrowing costs, adding appeal to potential investors.
Traditional interest rate sensitive sectors
Cyclical sectors like banks, insurers, property/Reits (Real estate investment trusts), utilities and housebuilders have traditionally operated with higher debts and are therefore sensitive to interest rates.
However, they actively manage interest rate sensitivity either through hedging activities (banks and insurers) or using a mix of longer-dated fixed debt and shorter dated floating rate debt (utilities and property).
This helps mitigate the immediate effect of higher interest rates, spreading out the extra costs over time. For example, water company Severn Trent only has 6% of its debt exposed to short-term rates, while two thirds are fixed and the rest is inflation-linked.
UK housebuilders are impacted by rising mortgage costs, which reduce mortgage affordability and demand. However, sector balance sheets remain in good shape, with companies like Barratt Redrow sitting on net cash.
Which are the most indebted firms?
While there isn’t a single metric for interest rate sensitivity, companies with high net debt to EBITDA (earnings before interest, tax, depreciation, and amortisation) ratios are generally more sensitive.
EBITDA is a proxy for cash flow. Investors use a net debt to EBITDA ratio to understand how many years of current cash flow are required to pay off the debt. High figures can be a bit of a red flag, as it means a longer time to pay off the debt.
Luxury car manufacturer Aston Martin has net debt of around £1.5 billion and negative operating profit. While two-thirds of the debt is fixed and therefore not sensitive to current interest rates, the rest is exposed.
The question for investors is around default risk rather than interest rate sensitivity as the company barely generates enough cash to service its debts.
Utilities
Water utilities Severn Trent, Pennon and United Utilities have high leverage ratios, but they are less sensitive to rising interest rates as most of their debt is longer-term at fixed rates of interest.
The average maturity of their debts is around 13 years which means they do not have to refinance for many years. Operating profits cover annual debt interest (known as interest cover) comfortably in the case of Severn Trent and United Utilities, by around three times.
Pennon, on the other hand, looks more exposed with interest cover of just over one, which means the company has less headroom for issuing new debt.
Hospitality
Pubs group Marston’s has seen an improving leverage trend in recent years, helped by the disposal of Carlsberg Marston’s Brewing Company and stronger cash generation. Interest coverage remains relatively tight at around 1.7 times.
JD Wetherspoon has been converting its pubs from leasehold to freehold properties which now represent around 72% of the estate compared with 50% a decade ago. This has resulted in rising net debt.
However, the debt is backed by high-quality properties, and the company has a policy of hedging interest-rate liabilities by swapping floating-rate debt into fixed rate debt, so it is relatively immune from rising interest rates.
Diageo
Guinness and Johnnie Walker maker Diageo is perhaps a surprising name to see on the list because its debt has an investment grade rating, which means the company is seen as financially stable by credit rating agencies.
Net debt stood at $21.7 billion at the end of 2025, which represents more than three times adjusted EBITDA, above Diageo’s stated target range of between 2.5 to 3 times.
New chair Dave Lewis, known as ‘Drastic Dave’, for his aggressive cost cutting at Tesco and Unilever, has lost no time in announcing a major restructuring plan at Diageo.
This includes stripping out $850 million of duplication coats and making $150 million in supply chain efficiencies.
Despite having higher than target leverage, it is important to note that Diageo’s debts are predominantly at fixed rates, with roughly half maturing in more than five years, which reduces sensitivity to rising rates.
Interest coverage is strong at more than six times operating earnings, which implies the company can handle rising interest costs.
Why does Jet2 have a big cash balance?
The package holiday and airline business has a high level of cash reserves at £1.2 billion, representing a large chunk of its market value. This reflects the board’s conservative approach to protect shareholders, given the company operates in a volatile, capital intensive and competitive industry.
Jet2 is unusual among airlines in that it buys and owns a large portion of its fleet rather than relying on operating leases. This requires stumping up cash for fleet renewal and growth, rather than relying on debt markets.
Jet2 returned £363 million to shareholders in 2026 via dividends and a new £250 million share buyback.
Canned fish maker makes debut
Food manufacturer Princes, which makes canned fish and Napolina pasta, reported net cash increased to £344 million in the March quarter compared with £311 million at the end of 2025.
The company floated on the London stock market in October 2025 at 475p per share, raising over £400 million in primary capital (the owners did not sell any shares), to support its strategy of buying European food and beverage brands.
This means the net cash position is likely to shrink as the company executes its growth plans.
Martin Gamble: Shares and Markets Writer
Martin Gamble is Shares and Markets writer at AJ Bell. He was previously the Education Editor of Shares Magazine. He has been with the business since 2019.
Martin graduated from the University of Kent in...