Not a penny more

Margaret Ewing, vice chairman of Deloitte

The long boom in corporate borrowing may be drawing to an end. Disruption in
credit markets last year and expectations of slower economic activity seem to be
reshaping attitudes among larger UK corporates.

The latest Deloitte survey of UK chief financial officers confirms that the
credit crunch has finally reached the corporate sector. Three quarters of the
CFOs we surveyed in December said that problems in credit markets have raised
the price of credit and two thirds said that credit has become less available.
Of the CFOs, 58% expect the credit crisis to have a negative effect on their
business this year.

A tougher credit environment certainly seems to have triggered a shift away
from debt-driven strategies by UK companies. In the past three months, CFOs have
become markedly less positive about using bank borrowing as a source of finance.
And only 37% of CFOs said their companies plan to raise gearing in 2008, down
sharply from 56% recorded in September.

UK corporates vary considerably in their dependence on debt but our survey
shows that larger firms look fairly well placed to cope with tighter credit
conditions. Most CFOs were confident they could tap alternatives to bank finance
such as equity or venture capital. And an overwhelming majority said they had
internal reserves they could use, such as undrawn facilities or cash.

But this is only part of the picture. We survey larger, mainly listed FTSE
350 companies and our results almost certainly understate the risks for the
wider sector. Small and medium-sized companies are much more indebted and
dependent on bank finance than larger firms.

Ominously, the latest survey of UK banks suggests that the credit squeeze
will intensify. The Bank of England’s credit conditions survey reports that the
banks plan to further tighten conditions for lending to corporates in the first
quarter of 2008.

In launching the CFO Survey last year, we aimed to shed new light on how
developments in financial markets affect corporates. The survey has revealed how
the credit crisis has changed corporate attitudes to borrowing.

The big unknown now is whether corporates will go further and reduce debt
levels in 2008. Some of the big international investment banks have already
started to do so. Such deleveraging often involves a squeeze on other
expenditure, particularly capital spending and employment.

A wider period of deleveraging in the UK corporate sector would be a sign of
tougher times for corporates and for the economy.
Margaret Ewing is vice-chairman of Deloitte

Related reading