Turmoil in credit markets has clearly taken a toll on corporate sentiment and 92% of CFOs see tighter credit conditions as likely to have a negative effect on the UK economy, according to Deloitte’s first CFO quarterly survey of “corporate financial attitudes” launched today, Thursday 18th October 2007 and undertaken during the period of 21st September to 2nd October.

CFOs were more optimistic about the effect on their own business, with 42% expecting some negative impacts but the overwhelming majority of them believing the impact would be slight. Almost half - 46% - said they expected no impact on their business.

The survey suggests that most CFOs believe that credit availability and cost have deteriorated for corporates, with 78% regarding short term market interest rates as high and 58% viewing longer term rates for corporate credit as “costly”. 98% of CFOs expect the credit crisis to reduce the availability of credit generally although only 26% anticipate a significant reduction.

Commenting on the results, Deloitte partner and Vice Chairman, Margaret Ewing said, “Most CFOs clearly believe that the availability of credit to corporates will be hit by the recent turmoil in credit markets. But our respondents see the credit crisis as primarily impacting the economy and UK corporates in general, rather than their own business. This may reflect the fact that CFOs of larger corporates believe their own company is robustly financed and they are confident of their banking relationships allowing them to weather the conditions”.

Corporates undervalued and underleveraged

63% of CFOs believe their company is undervalued by the equity market, despite the majority (60%) regarding UK equity valuations as fair.

43% of CFOs surveyed have taken more financial risk onto their company’s balance sheet in the last year. Moreover, despite tougher credit conditions, 56% of respondents plan to raise their level of gearing in the next 12 months.

Commenting on the finding, Ian Stewart, Associate Director of Deloitte Research said, “Many CFOs think that the equity market undervalues their business and this helps explain the unattractiveness of equity finance for many companies. Recent credit market turmoil does not seem to have dented corporates’ appetite for debt. The recent trend has been towards UK corporates raising their gearing and CFOs want to continue that process”.

Banks remain the favoured source of finance

The survey underlines the extent to which UK corporates use the banking system and debt markets to meet their financing needs, with a strong preference for bank debt compared to other forms of debt financing. Only 24% of CFOs rated equity as an attractive source of finance, despite the recent strength of the FTSE. Moreover 72% of CFOs expect to raise new debt or refinance facilities in the next 12 months.

Ian Stewart commented, “Corporates are still looking to the banks and debt markets for finance. CFOs see their cost of capital as having risen less than short term market interest rates. Indeed, 3 month inter-bank interest rates are well above the average for the last 10 years while UK corporate bond yields are well below their 10 year average. Meanwhile, the availability of credit is seen by CFOs as less of a problem than the cost of credit. So CFOs seem confident about being able to borrow, although it may be at higher rates”.

Bank of England data show that bank borrowing by non financial corporates rose by 17% in the year to August, close to the fastest rate in 17 years. However, the latest Bank of England’s Credit Conditions Survey reported that banks expect to “significantly” reduce the supply of credit to corporates in the next 3 months and to tighten conditions for corporate lending.

Margaret Ewing commented, “CFOs favour bank borrowing and want to increase their gearing. The big question for the economy is whether the supply of bank capital is there to meet this demand.

“In these financial conditions, the multiple demands and pressure on CFOs are significant and they will be seeking to neutralise their companies from the impact of the credit market turmoil. There will be an increased focus on cash, cost and risk management and it will be important for CFOs to consider how the current credit issues and the possible slow down in economic growth may impact not only their own company but also those they do business with.”

Ends

Notes to editors
The Deloitte CFO Survey: Benchmarking Corporate Financial Attitudes is a new quarterly survey of UK Chief Financial Officers and Finance Directors from major British companies. The third quarter survey took place between 21st September and 2nd October. 51 CFOs responded to the survey, representing 13 FTSE100 companies, 34 in the FTSE250 and four other companies. The combined market capitalisation of the firms surveyed is over £200 billion.

About Deloitte
In this press release references to Deloitte are references to Deloitte & Touche LLP, which is among the country's leading professional services firms. Deloitte & Touche LLP is the United Kingdom member firm of Deloitte Touche Tohmatsu ("DTT"), a Swiss Verein whose member firms are separate and independent legal entities. Neither DTT nor any of its member firms has any liability for each other's acts or omissions. Services are provided by member firms or their subsidiaries and not by DTT. Deloitte & Touche LLP is authorised and regulated by the Financial Services Authority.