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UK firms move away from debt-driven strategies

While there has been much speculation about the effects of the credit crisis, the fourth quarter 2007 Deloitte Chief Financial Officers Survey provides detailed evidence of the early effects, says Nigel Shilton

The survey reveals a world of scarcer and more expensive bank credit, which is triggering a shift away from debt-driven strategies by UK corporations.

Findings from the survey include:

  1. 58 per cent of CFOs expect the credit crisis to have a negative impact on their business in 2008;

  2. Only 37 per cent of CFOs said that their companies plan to raise gearing in 2008, down from 56 per cent in September;

  3. The proportion of CFOs who rate bank borrowing as an attractive source of external finance has dropped from 73 per cent to 44 per cent.

UK corporations vary in their dependence on debt finance and most seem to be in a fairly strong position and have alternative sources of funds available.

But the CFO Survey covers larger companies and almost certainly understates the risks for the wider sector. Small and medium sized firms are more dependent on bank finance.

The latest data suggests that the credit squeeze is likely to intensify. Last week’s Bank of England credit conditions survey reports that UK banks plan a further tightening of conditions for lending. Already the sector is starting to feel the squeeze.

Typical questions companies should ask when developing their spending plans include:

  1. What is the impact of the increasing cost of capital?

  2. Are there viable alternatives to bank borrowing such as capital market debt funding or public or private equity?

  3. What additional resources such as overdraft facilities, cash and saleable assets currently exist that could be used to fund the business?

  4. What impact could the credit squeeze have on order books?

The research suggests that a long boom in corporate borrowing could be drawing to an end.

In the last eight years, bank borrowing by UK non-financial corporations has risen by over 12 per cent a year, more than four times the rate of growth of the economy.

While larger corporations look well placed to cope with a credit squeeze, all firms - small and large - should be reviewing their 2008 forecasting.

Nigel Shilton is a construction partner at Deloitte