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9 5月 2024
Insight
Impact on Business
What is the impact of current macroeconomic events and geopolitical events (supply-chain issues, interest rates, inflation, conflict etc) on your business?
- With 64% of respondents reporting a neutral to negative outlook, a 15% decrease from 2023, the dominant message from respondents in 2024 is that some level of continued business interruption is the new normal.
- Many respondents expressed confidence in the ability of corporates to cope with these challenges and to continue to manage systemic risk and uncertainty. For some respondents, the reality of managing continued high interest rates and persistent supply chain disruptions for a prolonged period has led them to build wider risk management processes into their business culture.
- Amidst the uncertainty, some corporates are finding a positive story, such as increased competitiveness as a result of running "fitter and leaner operations" and also how certain sectors were benefitting from these trends, which may account for the 24% of respondents reporting a neutral to positive outlook, an 8% increase from 2023.
- While Covid restrictions have long since eased, the Russian invasion of Ukraine continues, and other geopolitical issues, such as those confronting the Middle East, China's economic downturn and upcoming elections in the US, UK and other major economies contribute to an uncertain macroeconomic environment. As a result, some respondents reported weighing their options when considering accessing the debt markets, managing their business size and growth more generally, including accelerating refinancing timelines and delaying capital expenditure.
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"The experience of recent years means that we should expect the unexpected. The nature of geopolitical events and the uncertain economic environment mean that the path is far from certain." "We are all getting used to managing financial risk against the worst macro environment you could wish to think of. You think it can't get worse and then, guess what, it gets worse." "The outlook seems to have settled a bit more but still feels like something else will arise which will impact the debt markets. I wonder what the next thing will be." |
Impact on debt strategy
What is the expected impact of such events on your 2024 debt strategy?
- A large portion of respondents (41%, as compared with 25% in 2023) reported that macroeconomic and geopolitical events would have no, or a minor, effect on their 2024 debt strategy. The overwhelming sentiment from respondents in 2024 is that markets are open, accessible and trading through crises. As one respondent phrased it, "Markets stopped at the risk of Grexit…and now you don't see the dislocation in credit markets that you once did as a response to economic and political issues". These responses reflect an assumption, whether accurate or not, that macroeconomic and geopolitical disruptions are no longer creating fragility in the corporate debt markets.
- For 14% of our respondents (no change from 2023), macroeconomic and geopolitical uncertainty has catalysed plans to defer or bring forward debt financing/refinancing. Some respondents reported implementing financing arrangements now to cover the next disruptive event and avoid being caught out, such as putting in place USPP shelf-facilities and having DCM programmes ready to access markets at short notice.
- In general, respondents emphasised the impact of inflation less than in 2023, pointing to factors such as cost of funds and market access as drivers of when to access the corporate debt markets. Instead of waiting for interest rates to fall, respondents are now asking whether the environment is sufficiently stable and whether they should be accessing the market now rather than waiting until later when there might be more execution risk due to potential macroeconomic events.
- The importance of cash and conserving it on balance sheet was a recurring theme in interviews.
- Only 8% of respondents are seeking to increase debt requirements to facilitate M&A activity, a 5% decrease from 2023. Anecdotal evidence from respondents also suggests that corporate M&A is often being funded with equity or retained cash, as opposed to debt and that there remains some way to go before vendor price expectations reduce enough in order to absorb some of the higher cost of debt.
- A decreasing number of respondents anticipate current macroeconomic and geopolitical events will necessitate waivers of debt terms (2%, down from 3% in 2023); them raising equity (3%, down from 10% in 2023) or making disposals of assets to raise funds (2%, down from 8% in 2023), reflecting a less distressed outlook and greater certainty and availability of debt funding.
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"Cash is king. Before, quantum and tenor [of debt] were key. Now, it is interest rates and management of working capital that are important." "One point I see is the increasing importance of cash as a resource. Where there were flat yield curves and low interest rates, cash was an unfortunate by-product of doing business, having to park it somewhere. Now cash is a clear driver of shareholder value in terms of conserving cash." "Get it [debt raising] done, who knows what is going to happen." |
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