November 2013

Access to capital

9th Australasian Capital Confidence Barometer

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Q. Does your company plan to refinance loans or other debt obligations in the next 12 months?

EY - Does your company plan to refinance loans or other debt obligations in the next 12 months?

Credit widely available

The capital markets are open for business and ready to help finance the next raft of M&A activity.
Confidence in credit availability is high. The percentage of companies planning to use cash to finance deals has fallen from 58% down to 48% in the past six months. Instead, companies will use more debt and, eventually, equity to finance new M&A.

Interest in the equity capital markets has strengthened recently following share market rises. In Australia this has led to IPOs for the first time in several years, while in NZ the IPO market has been stronger.

After years where deal-making was dominated by cash transactions, the environment is shifting. The increasing willingness to use credit, and the considerable potential for companies to harness equity, are yet more factors pointing to future M&A activity. The tipping point is coming. It’s time to get in on the action.

  • Confidence in credit availability

Large corporates continue to have little trouble accessing credit. Confidence in the global availability of credit has stabilised at around 90%. Just a year ago, confidence in improving global credit availability was half of what it is today. Those seeing a decline in availability are close to the lowest level in two years.

We expect this confidence in the availability of credit, coupled with a positive economic outlook and sound organisational models to accelerate deal-making.

  • 90% of respondents consider credit availability is either stable or improving

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  • Debt slowly replacing cash

Despite the abundance of credit, companies are still more likely to use cash to finance deals. That said, the percentage of companies planning to do so is falling. Six months ago, 58% were still using cash. This has now fallen to 48%.

At the same time, the attitude towards deal financing via debt facilities has relaxed, with respondents willing to use debt growing from 22% to 35%. This change has been driven by moves to increase shareholder returns by using a less conservative capital structure and a significant increase in liquidity, debt pricing reductions and financiers’ willingness to fund transactions to increase their lending positions.

  • Gearing remains highly conservative

Debt levels are unlikely to increase dramatically. Despite improved conditions, companies remain cautious around gearing, with debt-to-capital ratios only creeping up incrementally over the past year. Australasia may be using gearing slightly above the global average, but only 15% of companies have ratios higher than 50%. Indeed, 49% of local companies still have a debt-to-capital ratio under 25%, just 4% less than a year ago.

We expect these conservative levels to continue for a little longer yet. Over 80% of respondents expect their gearing to remain constant or reduce over the next 12 months. After the shocks of recent years, companies will not rush into high levels of debt. As the cost of equity comes down, this will be the next funding source to move.

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  • Refinancing volumes expected to increase

The number of companies planning to refinance loans, or other debt obligations, has increased from 20% to 32% in the past year. This is partly due to the large wall of refinancing that occurred 12-24 months ago. However, we are also seeing a number of borrowers refinancing early, to take advantage of favourable conditions in the Australian market. Given the current low loan activity, increased liquidity is reducing pricing, with Reuters observing a 40bps dip in the past six months alone.

Q. Does your company plan to refinance loans or other debt obligations in the next 12 months?

  • Plans focus on maturing debt, not extending loans

The increase in retiring maturing debt is positioning corporate capital structures for growth. Companies are still looking to refinance, but largely to retire maturing debt, rather than to seek opportunistic pricing and terms. Six months ago, just 9% of refinancing went to retiring maturing debt. Now, this has risen to 42%.

Companies should be looking to take advantage of the current favourable lending conditions, which are being driven by low transaction volumes and increased liquidity. They may find opportunities to improve price, re-negotiate terms and conditions and extend tenure. For example, banks are now willing to extend tenure beyond the three-year timeframe, still at competitive pricing.

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