| Corporates shift away from debt-driven strategies |
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| Written by Adrie van der Luijt | |
| Monday, 07 January 2008 | |
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Fifty-eight per cent of chief financial officers of some of the UK’s major companies now believe the recent turmoil in credit markets will adversely hit their businesses in 2008.
This is a marked deterioration from September when 42 per cent of CFOs taking part in Deloitte’s CFO quarterly survey expected a negative impact. The CFO Survey also suggests that most major corporates are well placed to cope in a world of scarcer and more expensive bank credit, with internal and external financial resources available that they could draw upon in a prolonged credit squeeze. Fifty-two per cent of CFOs said they were optimistic about their ability to find alternatives to bank borrowing, such as capital markets debt and public and private equity. Additional financial resources Ninety-five per cent of CFOs say they have additional financial resources, such as undrawn facilities, cash and saleable assets, which could be used to fund the business over the next twelve months, should the need arise. Two-thirds of CFOs say they do not need to undertake significant refinancing of debt or bank credit for over a year and some have no near-term refinancing needs in the next two years. Deloitte vice chairman Margaret Ewing pointed out that CFOs were fairly sanguine about the impact of the credit crunch and consequential implications for the economy on their own business three months ago. She added that as problems in credit markets have persisted, however, CFOs had seen more direct evidence of the effects on the cost and availability of capital. The users of corporate capital are beginning to take a more negative view of the outlook as a result. Ewing said that the survey demonstrated that corporates vary in their exposure to changes in market interest rates and availability of bank debt. Most major UK companies have alternative funding resources already available to them that they could draw on in the event of a prolonged squeeze on debt finance. Many UK CFOs continue to favour bank credit as a source of external finance for their business, where there is a need to raise a new financing or undertake a refinancing. Only 44 per cent now favour this as a source of financing, however, compared to 73 per cent three months ago. Attitudes to debt Regardless of the funding situation, there is now evidence that UK corporates are increasingly feeling the effects of the credit crunch. Three quarters of CFOs said that events in credit markets have raised the price of credit and two thirds said it has reduced credit availability. Ian Stewart, associate director of Deloitte Research, commented, “CFOs are saying that the effects of the credit crunch have fed through the banking system and are affecting the corporate sector. Events in credit markets seem to be beginning to reshape strategic and funding plans of corporates, and in particular, their attitudes to debt.” In December 37 per cent of CFOs said that they plan to raise gearing in 2008, down sharply from the 56 per cent recorded in September. Twenty per cent of CFOs believe the credit crisis has adversely affected their companies’ capital spend plans for 2008. Period of corporate deleveranging Higher debt costs suggest that a period of rising corporate indebtedness and declining equity issuance – the process of de-equitisation - may be slowly drawing to an end. Stewart noted that CFOs had cut back on planned debt issuance and on earlier plans to raise gearing in the last three months. “Moreover, 60 per cent of CFOs think the UK is moving towards a period of corporate deleveraging and rising equity issuance,” he added. The fourth quarter survey took place between 30th November and 11th December 2007. 43 CFOs participated representing 38 FTSE350 companies, three private companies and two with overseas parents. The combined market capitalisation of the firms surveyed is over £170 billion.
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