| CFOs remain cautiously optimistic |
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| Wednesday, 23 April 2008 | |
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Cuts in interest base rates have failed to improve the supply of credit or to reduce the cost of debt available, even for larger UK companies.
The latest Deloitte CFO Survey for the first quarter of 2008 shows that 73 per cent of corporates said credit was costly in March, up from 64 per cent in December. Sixty-two per cent reported that credit is difficult to obtain, up from 55 per cent in December. Improvement in credit conditions Margaret Ewing, Deloitte partner and vice chairman, said that despite reductions in base rates in December and in February, corporates, like consumers, were facing tougher credit conditions and, so far, lower base rates would appear not to be easing the situation. The Deloitte survey indicates that CFOs believe the credit crunch has at least 6 months to run, with 21 per cent seeing credit conditions improving in the fourth quarter of this year and 50 per cent expecting an improvement in the first half of 2009. With an anticipated improvement in credit conditions by mid 2009, however, CFOs remain fairly positive about the longer term outlook for credit. Most CFOs plan to raise credit (either new or refinancing) over the next 12 months and more companies in the survey are planning to increase gearing over the next year than to reduce it. Cutting back on expenditure The survey also highlights that companies are expecting to respond to tougher market conditions by cutting back on expenditure. Sixty-five per cent of those surveyed said they were likely to cut discretionary spending, such as corporate travel and entertainment. Fifty-five per cent are likely to curtail future hiring and 38 per cent are considering reducing their current employment levels. Investment is also being targeted, with 38 per cent of CFOs indicating they are likely to reduce capital expenditure. CFOs are determined to protect dividends, however, with only 3 per cent indicating that they are likely to reduce dividend payments. New opportunities Ian Stewart, director of Deloitte Research, said that the survey showed how stress in financial markets was likely to feed through the corporate sector and into the economy. “Cost control is a priority for corporates and this spells a squeeze on discretionary spending, jobs and investment,” he added. Despite the challenges, 82 per cent of CFOs see new opportunities in the current environment. UK equities are now seen as undervalued by a majority of CFOs and this has bolstered sentiment about corporate mergers and acquisitions. On balance CFOs think the credit crunch will make it easier for corporates to undertake M&A, with lower valuations and weaker competition from private equity as supportive factors. “In aggregate the UK corporate sector is cash rich and profitable – which puts companies in a good position to capitalise on lower asset values by undertaking acquisitions,” Stewart concluded. Related articles
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