Capital Becoming Competitive Differentiator for Large Companies

Refinancing bubble threatens split between cash-rich businesses and those in need of capital, Deloitte reports in 'A Tale of Two Capital Markets'

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New York — March 29, 2011 — The split between cash-rich businesses and those in need of capital has set the stage for a bifurcated economy, with growing challenges for small- and medium-sized companies, finds the recent Deloitte study "A Tale of Two Capital Markets."

Based on an analysis of debt in more than 9,000 large companies in the G20, the report summarized the looming global debt picture: competition for capital will intensify as over $11.5 trillion of financing will be due in the next five years, likely limiting the availability of debt capital. This is made all the more challenging by public sector deficits that create significant new competition and volatility in capital markets.

"The credit crisis of 2008 and the volatile post-crisis environment create 'a tale of two capital markets' for businesses today," said Ajit Kambil, global research director of Deloitte's CFO Program. "Capital is now a powerful competitive asset, and companies who can raise it quickly have a clear advantage."

The Inflation Inflection

According to Kambil, not only is the economy at an inflection point on interest rates, but economic recovery is constrained by a growth in demand within developed economies. For companies with significant leverage, CFOs need to consider moving with urgency to convince boards and CEOs to recapitalize, he said.

"CFOs with large cash-rich companies should determine when to outline strategies to utilize an organization's strength to raise capital. This can represent a significant competitive advantage for large companies with low leverage over their smaller competitors," Kambil added.

The study also found that CEOs and CFOs of large companies with solid balance sheets have an opportunity to access bank loans and debt and equity markets at low costs to finance their growth before interest rates rise. In contrast, organizations that entered the crisis with high leverage and a lot of debt coming due in the next few years will have to find ways to improve their balance sheets, and many may struggle to refinance. As peak demand for refinancing debt approaches, new regulations and continued bank and market failures will likely further limit the availability of debt capital.

Sovereign Debt Threat

In addition, Deloitte's research found that despite the constrained economic environment and rising interest rates, CFOs are optimistic about their ability to increase their capacity to service debt. Many said they will first turn to the cash reserves their companies built before and during the recession. Companies with strong cash flows and low leverage have many strategic options to increase shareholder value through a combination of acquisitions, share repurchases and dividends, and organic growth.

"The U.S. debt owed to third parties (like China) now exceeds 60 percent of our GDP," said Robert N. Campbell III, vice chairman and U.S. state government leader with Deloitte. "If we stay the course we're on, the U.S. debt will exceed 100 percent of GDP by 2020 and 200 percent of GDP by 2030, and interest alone on the U.S. debt will reach $1 trillion by 2020."

Campbell continued: "The rising sovereign government debt is likely to lead to rising interest rates, inflation and a diminished confidence in the U.S. dollar. In that environment, it will be challenging for many corporate concerns to make informed long-term capital investment decisions. In addition, the rising government borrowing could create a competition for capital with corporate concerns seeking to refinance their short term debt.

On the contrary, the study reported that companies with high leverage may have to further diversify their sources of capital and are likely to have to sell assets. These companies may become more vulnerable to hostile takeovers, which could lead to significant industry consolidation.

"The first imperative for cash-poor companies is to build cash reserves and deleverage in order to ride out the forthcoming wave of debt refinancing," Kambil advised. "Companies should shore up their balance sheets quickly before the competition for scarce capital creates further competitive disadvantages."

More Findings

"A Tale of Two Capital Markets" study also found that:

  • Though there is $9 trillion in cash reserves across the world's 9,000 largest companies, these reserves are unevenly distributed and mainly reside in the financial services industry, with only about $2 trillion of cash outside financial services. Unless this cash is deployed to refinance companies, there is a potential deficit in refinancing non-FSI debt.
  • The Americas account for most of the maturing debt, with $5.7 trillion out of $11.5 trillion globally. Asia has the lowest magnitude of debt, but also has the highest proportion of outstanding debt maturing, with 69 percent set to mature in the next five years. Similar patterns of increasing debt maturities across the world suggest intensifying global competition for capital.
  • According to recent global CFO surveys, 62 percent of CFOs plan to maintain or increase their debt level over the next three years, and 50 percent plan to use their existing cash reserves to pay down debt.

About the Report

The report is based on primary and secondary research. Surveys of more than 1,000 CFOs and financial executives worldwide during August and September 2010, as well as interviews with experts on the economy, debt and strategy provided insights into today's capital market.

Secondary data analysis from diverse financial data sources examined the debt and cash positions of more than 9,000 of the world's largest public companies in the G20.The companies analyzed account for $23 trillion in revenues — nearly 30 percent of the world's gross domestic product, estimated as $70 trillion in 2009.

The study is available here. For more information about Deloitte's CFO Program, see here.

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