Debt in the World’s Top Companies: A Tale of Two Capital Markets
Deloitte insights video podcast
Debt — and the inability to pay that debt — were the clots that caused the recent financial heart attack felt around the world. To better understand the global debt picture, Deloitte has surveyed more than 1,000 financial executives over the past four years. The study revealed a bifurcated landscape, a split between cash-rich businesses with opportunities ahead and small- and medium-sized companies that will have to contend with a more challenging environment.
Tune into this episode of Deloitte Insights to learn more about the study and how executives can get ahead of the curve.
Originally published: April, 2011.
Ajit Kambil, global research director, CFO Program, Deloitte LLP.
Rob Olsen, partner in Deloitte & Touche LLP and the global co-lead of Capital Advisory.
Sean O’Grady, Host, Deloitte Insights:
Hello and welcome to Insights. Today, we are reviewing a study called the Tale of Two Capital Markets. It is an analysis of debt in the world’s top companies and it was developed by interviewing over 1,000 CFOs and financial executives over the past four years. We are joined in the studio today by one of the study’s authors, Dr. Ajit Kambil, the Global Research Director for the CFO Program at Deloitte Services LP. We are also joined by Rob Olsen, a Partner in Deloitte & Touche LLP and the Global Co-Lead of Capital Advisory. Gentlemen, thank you both for being here. Can you tell me why did you conduct this survey and what has it revealed about the economy in the global debt picture? Ajit?
Ajit Kambil: Well, about two years ago, we sort of went through a financial heart attack in the global economy and that was really caused by lot of debt and the inability to repay that debt. We also wanted to understand what does a debt picture look like globally since the credit crisis and what’s coming due and what we found is we still have a lot of debt coming due; about $11.5 trillion of debt coming due in the largest companies of the world in the next five years and that has to be dealt with.
Sean O’Grady: And Rob your thoughts?
Rob Olsen: Yeah, in addition to the $11.5 trillion of debt, to me what is most surprising is how few CFOs actually recognize that there is a big problem out there. To me, $11.5 trillion of debt coming due over five years means availability of capital is going to be constrained, cost of capital is going to go up, but yet the CFOs across the globe, 50 Percent of them, think that raising financing over the next 12 months is going to be easier than it was this year and that to me is a surprise. The third kind of thing that is surprising to me or interesting about the survey is that there has been other work done or surveys done on the debt maturity wall, which is what often people call this and the feeling was the high-yield mark has been replacing much of this debt that is coming due and though all that is true, it is certainly not solving the problem, and that was the survey is really showing; debt is being replaced with another form of debt that has to mature and if we look over the next five years, there is still a significant amount of capital that is coming due and that is not going to change over a very long period of time. So, it is a really important consideration for companies to think about.
Sean O’Grady: Now, one of the things that I found interesting was that the studies reveal that there are 10 things that every C-Suite should know and one of them is that the maturity of corporate debt may make the availability in cost or capital a strategic variable. Rob, can you elaborate on that?
Rob Olsen: What we learned from the study is that there is a real bifurcation for companies with respect to the debt maturity wall. On one hand, this could be a real strategic opportunity for them to take advantage of weaker companies that won’t be able to raise capital to be able to buy other companies, take advantage of the fact that capital is really a strategic option that others don’t have and so there is a huge opportunity for the larger, more cash-rich companies to take advantage of. On the other side of the equation, are the small and mid-size companies that are going to have tough choices to make. They are going to have sell assets, try and generate cash with the working capital, manage their costs in a different way, and consider all other forms of capital for them to survive in what will be a very tight credit environment.
Sean O’Grady: And Ajit, your thoughts?
Ajit Kambil: And what this could mean is that the larger companies that are well positioned from a cash perspective can really outdistance the smaller companies because they are able to invest in innovation and M&A for growth in a way that is at an advantage from a cost to capital perspective versus the smaller companies, and so the large may have an opportunity to get larger.
Rob Olsen: But that only happens if companies actually recognize this is going on. So, back to the piece where 50 Percent of the companies think it is going to be easy to raise capital; if companies actually embrace this study and take advantage of and talk about at their Boards, then they will be able to do exactly what Ajit says: take advantage of the fact there are companies out there that are going to be struggling and it will be a great M&A opportunity for many companies.
Ajit Kambil: In fact, every board should really ask themselves, how much debt is coming due in the next few years? How they are going to recapitalize it and what are the opportunities that they have in recapitalizing their debt from a strategy perspective, whether it’s M&A, investment and growth, share buybacks, all the things that could really help your company move its share price forward in the marketplace vis-à-vis competitors.
Sean O’Grady: Now, the study also revealed that there is a similarity in the debt maturity patterns across the Globe. Ajit, what does that mean for businesses?
Ajit Kambil: Well, this is a global phenomenon. Though many people look at things from a single country perspective, the debt is coming due in a similar pattern all over the world. The greatest magnitude of debt is actually coming due in the United States.
But, on the other hand, in Asia, which has a smaller magnitude of debt coming due, we find the total amount of outstanding debt is a proportion of total debt that is coming due in the next five years. It is actually higher in Asia. So, despite the Asian economies growing, companies in Asia are going to have to pay particular attention to how they are going to have to refinance their debt. So, this is a global phenomenon and we have to think about it in a global way and build that global picture.
Rob Olsen: What is clear to me, Ajit, is because the capital is going to go up across the globe, the availability of capital is obviously not going to be the same as it has been, and the study certainly verifies that. But what is also interesting is that there will be arbitrage opportunities for companies.
Ajit Kambil: Absolutely.
Rob Olsen: So, the same considerations are going on throughout the globe, but there will be situations where companies can raise capital more cheaply and in more abundance in certain regions of the globe. So, there will be an opportunity for the cash-rich companies to actually take advantage of what is going on and that is what we are seeing in our study.
Sean O’Grady: I would like to hear your thoughts on two more points and they are cash reserves and regulatory reform. How are these going to influence the global debt-refinancing picture? Ajit, let’s just start with you.
Ajit Kambil: Well, there are a lot of cash reserves out there. There is probably about $9 trillion in cash reserves across wide variety of companies but they are just not distributed where the cash is often needed, so a lot of the cash is with financial services companies, a lot of the debt may be in the retail sector, or other industry sectors.
So, the question is how do you get the capital from one sector to help refinance the others and what is it going to cost at the point of refinancing, but it also means there is a lot of powder dry that can be used for the kinds of M&A activity and other kinds of activity that we expect to see as people who have cash on the sidelines begin to put it to productive use.
Sean O’Grady: Rob, what about regulatory reform?
Rob Olsen: Well, meanwhile, there are some key changes going on that are going to affect the availability of capital, specifically Dodd-Frank and the Basel III are going to reduce the availability of capital that could constrain banks’ ability to invest capital, it would cause them to be more cautious, and as a result there is just going to be less capital available and the costs are therefore going to go up. And you compound that with bank failures that have gone on in various parts of the Globe. The CLO vehicle is really no longer around to finance companies. It is estimated that half of the LBOs were financed with CLOs during the hay day of 2007 2008. CLOs are no longer in existence. So, you have lost that form of capital and then securitization is generally, which many banks were using to take advantage of being able to invest more and more capital and now they can’t offload that with a securitized vehicle, so all those things are going to constrain capital and cause the interest rates to rise.
Sean O’Grady: As we wrap all these up, we have been talking about the bifurcation, cash reserves, regulatory reform; what is the call to action for the C-Suite? What do they have to do to navigate this? Rob?
Rob Olsen: I think, most importantly, CFOs obviously embrace what is going on. We have got some key information, a study showing that not a lot of them are aware of it, so we need to embrace this information, but it does not stop at the CFOs and has to go back to the boards of those companies and their CEOs. This has to be an open dialogue, what is going on from the capital perspective, and then what are you doing from a strategic side to take advantage of the situation that is going on globally. So, to me, that is a big takeaway. The second one I think about is getting ahead of the curve. Companies, if they want to refinance, it is going to take 12 to 18 months, whereas four to five years ago, you could do it in three or four months. But companies need to do that from a strategic perspective in that if you recognize a debt, it is going to be not as abundant as it was historically, interest rates are going to rise, then take advantage of that knowledge today. Get ahead of the curve, refinance when you can, and consider alternate forms of capital, those are key takeaways for me.
Ajit Kambil: I just second what Rob said.
Rob Olsen: You know Ajit, one of the things that you often see in the capital markets is that we all kind of hope that things are going to improve. My stock portfolios are down and I am hoping it is going to raise again and we do not have any particular good reasons why it might. There is definitive information here that the debt problem is not going away. So, hope is not a strategy that is going to be successful here. People really have to understand the issue and then develop a strategy to take advantage of what they are going to face over the next five years.
Sean: So, hope is not a strategy. You have been listening to Dr. Ajit Kambil, the Global Research Director for the CFO Program at Deloitte Services LP, and Rob Olsen, a Partner in Deloitte & Touche LLP and the Global Co-Lead for Capital Advisory. If you like to learn more about Ajit, Rob, or any of the topics we discussed on this broadcast, you can find them and many more on our Web site, it is www.deloitte.com/us/podcasts.
For all the good folks at Deloitte Insights, I’m Sean O’Grady – we’ll see you next time.