Dodging BulletsLeader |
/Deloitte Review 6 - Winter 2010/us_Kambil_200x200_011210.jpg)
|
January 2010
As I write this column, the U.S. stock markets are close to their highs for the year, up about 60 percent from March 2009 lows. China, India and other emerging markets are growing at rates exceeding earlier expectations, and emerging markets have produced even higher stock returns. Foreclosures in the United States seem to be slowing, and housing prices in the Case-Shiller index are inching forward in many markets, helping consumers grow wealth from home equity. Indeed many economists are pointing to a V-shaped recovery in the United States, and the general consensus is that the quick coordinated stimulus and policy efforts by governments and central banks worldwide helped the United States and the world to dodge the bullet of a Great Depression scenario.
While the worst of the 2008 credit crisis appears to be over, CEOs and CFOs will have to help their companies dodge a few more bullets in coming years. Specifically, for those with debt coming due in the next three to four years, the competition for capital will be more intense than before. In the next five years nearly $2 trillion of debt will mature. Annual new issues of high-yield debt in the United States generally average around $200 billion. Much of this capacity will be required to refinance existing dollar denominated debt as it matures.
Despite an improving economy in the United States, over one hundred banks have been shuttered, and many more are likely to fail. Bank lending will remain challenged in the next few years as banks try to improve their balance sheets. For CFOs and CEOs, a constrained lending environment with a large amount of maturing debt suggests that the credit environment is likely to remain both costly and challenging for the next few years. In this environment the relative cost of capital will become a key strategic differentiator – where companies with good balance sheets and the ability to access capital more cheaply have an advantage over those that do not.
So what are the options to consider for those who face the prospect of having to roll over debt?
The first option is to continue reducing debt and tightly manage cash so capital does not need to be borrowed at expensive rates in the future. Second, take advantage of the moment now to recapitalize and issue new debt ahead of increasing competition for debt capital. Third, diversify the sources of capital by potentially reaching out to pension funds, private equity and sovereign wealth funds. Fourth, consider the sale of non-core assets.
While the world economy may have avoided the catastrophe of a great depression, many CFOs and CEOs will have to dodge a few debt bullets coming forth in future years.
Ajit Kambil
editor at large
