Canadian Capital Confidence Barometer - April-October 2013

Access to capital

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Credit increasingly available

In addition to their improved outlook on the economy, Canadian companies are more confident than ever about their ability to access the global credit markets.

45% of Canadian respondents view the global credit availability as improving, compared with only 20% in October 2012

When asked about credit availability at the global level, 45% of Canadian respondents see improvement, the highest level in two years. Only 15% report a decline — again, the lowest level in two years. But as in several other areas, higher confidence was expressed by US respondents.

Please indicate your level of confidence in credit availability at the global level

Please indicate your level of confidence in credit availability at the global level

Global appetite for leverage poised to rise — but not in Canada

According to global and US respondents, we may be near an inflection point, with companies’ large-scale changes to capital structure now nearing completion. Debt-to-capital ratios remain fairly constant today, but the appetite for leverage is expected to decrease among Canadian respondents, whereas global and US respondents are expected to increase their leverage.

The mix of cash and credit to fund deals will move toward traditional levels as valuations start rising and companies gear up to do larger and more transformational deals that cannot be funded principally with cash. However, 42% of Canadian companies expect to decrease their leverage over the next year, raising the question of why more companies are not taking greater advantage of available credit.

For the next 12 months, the 23% of Canadian companies that plan to refinance debt say that in doing so, they will focus on retiring maturing debt and optimizing the capital structure (in non-stressed situations).

Cash dominates near-term deal financing

Almost half of Canadian respondents (49%) point to cash as their primary source of deal financing in the next 12 months. Despite abundant credit availability, just over one-third (38%) say they plan to use debt as their primary source. The predominant use of cash to finance deals may be indicative of companies’ ongoing cautionary mindset and evidence of their need to deploy cash currently earning low rates of return.

Viewpoint

Credit availability as a leading indicator

Our survey shows a slightly lower number of Canadian companies expecting an increase in their debt-tocapital ratio, from 25% in October 2012 to 21% in this Barometer. Despite an increase in those citing greater overall availability of credit (from 20% to 45%), Canadian companies’ appetite for leverage does not match that of their US counterparts. This is yet another indicator of increased conservatism and caution among Canadian executives.

Throughout the economic crisis, companies in preservation mode came to view the use of credit as a liability — a sentiment that seems to persist today in Canada. But the reputation of credit, like that of the economy, is slowly being rehabilitated. Respondents with low debt-to-capital ratios have been steadily falling over the last few Barometers: those with a ratio below 25% are down four percentage points over the past year, while those with a ratio of 50% or above are up eight percentage points.

At a time of ample credit availability and historically low pricing, leading companies are coming to view credit as a tool to fuel their growth agenda.