With long-term prospects for raising debt looking good, new sources coming on stream and investments in the pipeline, are FTSE 250 organisations turning a corner on Brexit?

The ability to raise debt is unlikely to be hampered by the ongoing uncertainty over Brexit say most FTSE firms. Despite short-term pain, according to the latest annual Corporate Debt and Treasury Report issued by international law firm, Herbert Smith Freehills, many view their long-term prospects optimistically. Debt raised, say respondents, will go towards business investment such as funding acquisitions, capital expenditure and joint ventures.

The report reveals that although 96% of respondent firms are impacted by Brexit, 68% are somewhat prepared and 19% fully prepared. Although with delays to Brexit throwing short-term planning into confusion – with many firms reporting strains on their supply chains and management teams – 74% of corporates are optimistic that Brexit will not affect their ability to raise debt in their preferred markets and currencies, in accordance with their own timetables.

Many firms are now tapping non-bank lending sources, with DCM and US (and increasingly UK) private placements cited as being at least as important for many corporates.

The report also indicates an increasing trend towards use of non-recourse receivables financings as a more cost effective working capital tool than traditional bank lending. Significant and increasing use of supply chain financing techniques are also reported.

Some 68% of businesses are planning to refinance or raise new debt over the course of the next 12 months: 41% will be refinancing and 27% will seek new debt. Of those seeking debt, 29% cited competitive pricing structures/interest costs as the main driver towards a particular source of funding. Twenty four percent said greater flexibility of terms.

With 37% increasing debt levels this year – up from 30% in 2018 – over two-thirds will be applied towards business investment: 33% will focus on acquisitions, 28% on capital expenditure.

Concerns met

Of the main impediments to raising corporate debt over the next three years, 82% cited macro-economic uncertainty. A general move towards protectionism and trade barriers concerns 53%. “Brexit may be relevant locally but the actions of Trump, China and the oil price are much more important,” said one respondent.

The consensus is that the recessionary impact of these factors, rather than these factors themselves, will be most likely to affect the raising of debt. The most likely effect (for 57%) will be to increase the cost of debt. Many respondents believe that the effect of such impediments would be manageable provided that they did not trigger a recession.

Although bank lending remains the bedrock of many corporate debt capital structures, the importance of relationship banking in borrowing decisions has declined 14% compared to 2018. Some respondents noted that relationship lending is under significant pressure. Conversations around ancillary business are reportedly becoming increasingly strained as banks, under more pressure on margins, become more aggressive.

Many corporates do not now borrow on a fixed interest rate basis. The risk is manageable in the short term with interest rate derivatives. A significant majority of respondents use interest rate derivatives, with 2019 expected to reveal significant increased interest in those derivatives over 2018, rising from 26% to 39%.

The phasing out of the various IBOR rates is a major issue for many treasurers. Respondents reported that potential solutions are slow in emerging, and those which are seem to be doing so in an uncoordinated way. However, 63% said they had not started contingency planning for the move away from IBORs. One respondent said: “Banks haven’t figured out what the IBOR transition means for them let alone their customers. Very few banks out there voluntarily raise IBOR transition with us”.

“2019 will pose a number of challenges and opportunities for treasurers,” commented Kristen Roberts, finance partner at Herbert Smith Freehills. “Whilst not directly impacting on debt raising, the consequences of Brexit and the wider projected economic headwinds will inevitably result in incremental planning being required by treasurers including the continued development of a wider set of creditor relationships across multiple debt markets.”

In addition, she said the growing interest in environmental, social and governance (ESG) principles will touch on a number of corporate treasury workstreams as it is becoming clearer how adoption of ESG targets can result in cost savings and access to additional sources of finance.

The proportion of respondents saying that ESG factors played a part in their debt funding strategy increased from 17% in 2018 to 49% in 2019. Some 29% of respondents said that they were reporting on ESG issues to lenders and other stakeholders, and the same percentage considered ESG credentials when selecting financial institutions with which to transact.