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Global capital fight threatens as refinancing looms large

Global capital fight threatens as refinancing looms large

A "looming global debt picture" of competition for capital is set to "intensify as over $11.5 trillion of financing will be due in the next five years", a new study finds.

The study called "A Tale of Two Capital Markets" pictures elements of a major split between large, cash-rich businesses and small-to-mid sized companies with higher leverage, as both face growing cash challenges in a worrisome global economy.

Deloitte - which carried out the research analysed debt in more than 9,000 large companies in the G-20 names - found that the situation will limit the availability of debt capital and the public sector's deficits will only increase capital-markets competition and volatility.

"Capital is now a powerful competitive asset and companies who can raise it quickly have a clear advantage," Ajit Kambil, global research director of Deloitte's CFO programme says. "Not only are we at an inflection point on interest rates, but economic recovery is constrained by a growth in demand within developed economies."

'Move with Urgency'

Kambil says one of the lessons of the study is that CFOs of companies "with significant leverage ... need to consider moving with urgency to convince boards and CEOs to recapitalise." Those cash-rich concerns should examine strategies for using the company's strength to raise capital. "This can represent a significant competitive advantage for large companies with low leverage over their smaller competitors," he says.

CEOs and CFOs whose large companies have solid balance sheets have good, low-cost access to bank loans and debt and equity markets, and should take advantage now, before interest rates rise, according to the study. Their situation contrasts with high-leveraged companies, which will be struggling to find ways of improving their balance sheets.

Peak demand for refinancing debt is approaching, but new regulations, continued bank and market failures are likely to continue to limit the debt capital.

Deloitte, however, finds that the limits of the economic environment and rising interest rates aren't stopping finance chiefs from being optimistic about being able to increase their debt-servicing capacity.

Many CFOs say they would use cash reserves first for that purpose. Strong cash flows and low leverage will give companies more strategic options to build shareholder value through acquisitions, share repurchases, dividends, and organic growth, the study suggests.

Robert N. Campbell III, vice chairman and US state government leader for Deloitte LLP, says that US debt owed to China and other third parties has grown to more than 60 percent of GDP. "If we stay the course we're on, the US debt will exceed 100 percent of GDP by 2020 and 200 percent of GDP by 2030, and interest alone on the US debt will reach $1 trillion by 2020," he says.

"The rising sovereign government debt is likely to lead to rising interest rates, inflation, and a diminished confidence in the U.S. dollar."

Such a situation would challenge companies as they face long-term cap-ex decisions, he notes, while higher government borrowing possibly would add to the competition for capital as companies try to refinance short-term debt.

Even with $9 trillion in cash reserves across the 9,000 large companies examined, those reserves are unevenly distributed, and are mainly found in the financial services industry, with only about $2 trillion of cash outside financial institutions.

Most of the maturing debt is found in the Americas, with $5.7 trillion of the $11.5 trillion total globally. Not surprisingly, Asia has the lowest debt level - although the highest share of outstanding debt maturing, with 69 percent set to mature in the next five years.

CFO surveys have been showing recently that 62 percent of finance chiefs plan to maintain or increase their debt levels over the next three years, Deloitte says, and half plan to use cash reserves to pay down debt

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