Despite higher borrowing costs, corporates are planning to borrow more this year in a strategy driven by working capital needs. Elsewhere, a recent report finds a spike in corporate concerns about bank lending and some companies diversifying their debt capital structures.
As interest rates crank higher, corporates have grown increasingly wary of raising debt and the cost of debt is a dominant factor in business decision-making. Despite higher borrowing costs, many corporates plan to increase their net debt this year – to the highest level in five years. The reason, argues Herbert Smith Freehills in its latest Corporate Debt and Treasury Report, is pressure on working capital particularly for corporates unable to pass on higher costs to their customers and the need to cover supply chain inefficiencies.
Whilst banks remain the mainstay corporate debt provider, corporates are shifting towards the debt capital markets and, for unrated corporates, term loan private placement markets. Elsewhere the report finds the collapse of Silicon Valley Bank, Signature Bank and First Republic and the emergency takeover of Credit Suisse, has spiked concerns banks will materially change how they deploy capital. This is exacerbated by the risk of further capital adequacy measures being required for banks. It’s leading some treasurers to broaden their banking syndicates and further diversify their debt capital structures to reduce funding source concentration risk.
In another trend, treasurers are rolling out an ever-greater cash management focus across their groups to ensure debt is utilised as efficiently as possible and to reduce interest costs. For some this is a significant task, releasing cash reserved by local teams across the globe and dealing with sometimes complex rules relating to the repatriation of cash.
Bank debt remains the primary source of corporate debt financing with some respondents noting bank debt has been surprisingly resilient given recent headwinds faced by banks. Despite this, a significant number of respondents warned against over-reliance on bank debt and the need to challenge assumptions bank debt would always be readily available in the amounts required by a business.
Whilst private placements now play a greater role in corporate debt strategies, their use has not increased as much as anticipated. Alternative lenders have not established themselves as a significant presence in the corporate debt market.
Some respondents noted the composition and size of syndicates was relevant to the pricing of their bank debt though expressed concerns some banks were becoming less competitive than others due to their regulatory capital regimes. Many respondents reported movement in their syndicates on refinancings and therefore the need to ensure there were more than sufficient banks involved in refinancing exercises.
Not all corporates are raising bank debt. Some respondents are seeking to tap into capital through disposals (8% of respondents) or raising equity (10% of respondents). Some respondents suggested sector and/or covenant quality would solely dictate a corporate’s experience in raising debt and that was inevitably feeding through to its strategy.
Sustainable finance
The survey finds a mood shift on sustainable finance. Whilst it remains the talking point in treasury circles, it faces several headwinds. These vary from the pressure to get the deal done in uncertain times, the very real challenges in completing sustainable finance transactions from a multitude of angles and questions as to whether sustainable finance really moves the needle on a corporate’s ESG journey making it a worthwhile pursuit. “Some treasury teams are challenging the role of debt finance in driving the sustainability agenda in the light of the need to get financings done in the current environment,” said Kristen Roberts, Joint Managing Partner of the firm’s Global Finance Practice and the UK/US and EMEA Regional Head of Practice.
The report concludes with divergent views on the use of interest rate hedging in the current market. On the one hand, there is a case of those requiring certainty; on the other hand, there are those predicting Europe and the US may have reached their upper interest rate levels.
