The long boom in corporate borrowing may be drawing to an end. Disruption in credit markets last year and expectations of slower economic activity seem to be reshaping attitudes among larger UK corporates.
The latest Deloitte survey of UK chief financial officers confirms that the credit crunch has finally reached the corporate sector. Three quarters of the CFOs we surveyed in December said that problems in credit markets have raised the price of credit and two thirds said that credit has become less available. Of the CFOs, 58% expect the credit crisis to have a negative effect on their business this year.
A tougher credit environment certainly seems to have triggered a shift away from debt-driven strategies by UK companies. In the past three months, CFOs have become markedly less positive about using bank borrowing as a source of finance. And only 37% of CFOs said their companies plan to raise gearing in 2008, down sharply from 56% recorded in September.
UK corporates vary considerably in their dependence on debt but our survey shows that larger firms look fairly well placed to cope with tighter credit conditions. Most CFOs were confident they could tap alternatives to bank finance such as equity or venture capital. And an overwhelming majority said they had internal reserves they could use, such as undrawn facilities or cash.
But this is only part of the picture. We survey larger, mainly listed FTSE 350 companies and our results almost certainly understate the risks for the wider sector. Small and medium-sized companies are much more indebted and dependent on bank finance than larger firms.
Ominously, the latest survey of UK banks suggests that the credit squeeze will intensify. The Bank of England’s credit conditions survey reports that the banks plan to further tighten conditions for lending to corporates in the first quarter of 2008.
In launching the CFO Survey last year, we aimed to shed new light on how developments in financial markets affect corporates. The survey has revealed how the credit crisis has changed corporate attitudes to borrowing.
The big unknown now is whether corporates will go further and reduce debt levels in 2008. Some of the big international investment banks have already started to do so. Such deleveraging often involves a squeeze on other expenditure, particularly capital spending and employment.
A wider period of deleveraging in the UK corporate sector would be a sign of
tougher times for corporates and for the economy.
Margaret Ewing is vice-chairman of Deloitte
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