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Debt finance now at most expensive since 2009

Author: ICAEW Insights

Published: 09 Jan 2023

Businesses may be facing a multitude of challenges, but CFOs’ concerns over the macroeconomic outlook are easing, according to new research.

As interest rates reach 3.5%, demand for credit among CFOs at the UK’s top companies is well below average levels and flagging. CFOs now consider credit as more expensive than at any time since the credit crunch of 2009, new research finds. 

CFOs view bank borrowing and debt issuance as less attractive sources of finance now than at any time since the financial crisis, according to Deloitte’s UK CFO Survey, Q4 2022. The survey showed that just over a quarter of the FTSE 350 CFOs polled say they expect their company’s demand for it to increase over the coming 12 months. An emphatic 70% of CFOs, however, rated credit as costly, while 45% say new credit is hard to obtain.

Simon Gray, Head of Business, ICAEW, says: “We’ve heard from smaller companies and those specifically in consumer-facing businesses that debt finance is now harder to secure. This probably reflects a reduced level of risk appetite given the multitude of challenges businesses of all sizes have faced and continue to face.”

But despite the challenging macro environment of high inflation, supply disruptions and rising interest rates, CFOs consider these economic challenges, particularly inflation, to have eased since October’s peak. Only two risks – weakness in the US economy and in emerging markets – have increased, according to the Deloitte survey, which was carried out between 6 and 16 December 2022.

Ian Stewart, Chief UK Economist at Deloitte, said: “The most aggressive tightening of monetary policy in more than 30 years is reshaping corporate attitudes to debt. Not since the credit crunch have CFOs rated debt as being less attractive as a source of finance for their businesses than they do today. When interest rates were at very low levels, debt finance easily eclipsed equity as a source of finance. CFOs now see them as being roughly on par.”

Gray says: “Inflation and rising interest rates have served to make debt finance more expensive. Although there are signs inflationary pressures are easing, higher interest rates are likely to remain for some time. We’re in a new environment, very different from the low interest rates we have experienced for many years, with rates arguably climbing back to more normalised levels.” 

CFOs also reported a fall in supply disruptions over the quarter and expected substantial further falls over the next two years. Only one in 10 CFOs expected significant or severe supply disruptions in a year’s time, the lowest reading since the question was included in the survey in mid-2021.

Stewart said: “In the last two years CFOs have had to deal with the biggest inflationary shock since the late 1980s. But the tide seems to be turning and concerns about energy supply and prices have fallen back. CFOs’ perceptions of inflation risk have dropped from October’s peak, and expectations for supply shortages, recruitment difficulties and inflation have eased.”

Most CFOs say they expect their companies to reduce hiring over the next year. Almost a third, however, still consider labour shortages as severe or significant. 

Although CFOs expect to cut capital expenditure, discretionary spending and hiring through 2023, they also said they expected higher investment in workforce skills and digital technology over the medium term. Almost 80% said they expected greater investment in digital technology and assets. 

Concerns over energy price rises and supply have lessened, consistent with the decline in energy prices since the summer and high stock levels of European gas. A mild winter in Europe has contributed to wholesale gas prices falling sharply, offering some relief to government over energy support payments to households and businesses. However, companies are still hopeful that government support will be extended once the current package ends in April.

Gray says: “Businesses look to the announcement on what happens next with the Energy Bill Relief Scheme. Although energy prices are coming down, they are still much higher than many organisations have been used to.”

CFOs were most positive about the outlook for the next three years, with 71% expecting increased productivity and improved performance.

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