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The Deloitte CFO SurveyNo return to business as usual
2009 Q2 Results
14 July 2009
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Contents
The Deloitte CFO Survey: Conclusions 1
Recovery in sight? 3
No return to boom 4
Deleveraging ahead 5
Optimism on M&A 6
Equity is back 7
Data archive 8
This is the eighth quarterly survey of Chief Financial Officers and Group
Finance Directors of major UK companies. The 2009 second quarter survey took
place between 12 and 26 June. 117 CFOs participated including CFOs of 29
FTSE 100 and 39 FTSE 250 companies. The remaining respondents were CFOs
of other FTSE companies, large private companies and UK subsidiaries of major
companies listed overseas. The combined market value of the 83 UK listed
companies surveyed is 396 billion, or approximately 30% of the UK quoted
equity market. The Deloitte CFO Survey is the only survey of major corporate
users of capital that gauges attitudes to valuations, risk and financing.
For copies of earlier CFO Surveys see www.deloitte.co.uk/cfosurvey
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The Deloitte CFO Survey No return to business as usual 1
Key points from the 2009 Q2 Survey
Optimism about the financial prospects of
the UK corporate sector has risen to the
highest level in two years.
Most CFOs expect the UK economy to recover
in 2010.
Credit conditions have improved for the
second consecutive quarter but they remain
tough and CFOs expect this to persist well
into the recovery.
CFOs are increasingly looking to equity and
bond markets for finance.
The environment for business is expected to
remain very difficult well into the recovery.
GDP growth is expected to be sluggish and
unemployment is expected to rise for at least
a year into the recovery.
CFOs believe the upturn will be marked by
tight credit conditions and high levels of risk
aversion.
Corporates are likely to react to these
conditions by reducing debt levels and cutting
costs.
Sentiment about issuing debt or equity
improved sharply in June, taking it to the
highest level since the Survey started in 2007.
Equity is now seen as a far more attractive
form of finance for corporates than bank
borrowing, a reversal of the situation in 2007
and 2008.
CFOs are positive about the outlook for
mergers and acquisition activity. Sentiment
about M&A and private equity activity has
reached the highest level in two years.
The first quarter 2009 CFO Survey, released in April,reported glimmers of hope in the economy and was
one of the earliest indicators to suggest that the
economy had, perhaps, troughed. Our latest survey,
carried out in June, shows that CFO optimism
continued to strengthen in the second quarter. We also
found a clear, though not universal, conviction among
CFOs that the UK economy will recover during next
year. But, while for most the end of the recession is in
sight, CFOs see further problems ahead. This quarters
special questions reveal that UK CFOs expect the
recovery to be marked by sluggish growth, a strong
focus on cost control and tight lending conditions
hardly a return to business as usual.
Recovery: good news, bad news
In June CFO sentiment about prospects for their own
companies saw the biggest ever increase, taking it to
the highest level since the CFO Survey started two years
ago. Most CFOs now expect a recovery to unfold in
2010, although a substantial minority, 23%, do not
expect a return to growth until 2011 or later.
Expectations for M&A, perhaps the most cyclical element
in corporate expectations, have risen very sharply.
83% of CFOs expect M&A to rise over the next year.
While sentiment has strengthened, perhaps reflecting
an improvement in credit conditions, CFOs do not
expect a quick upturn in demand for their own
products and services. Most, some 59%, see no revival
in demand for at least a year. Moreover, one of our
special questions this quarter shows that an
overwhelming majority of CFOs expect the environment
for business to remain very difficult through the first
year of any recovery.
Most CFOs think the upturn will be sluggish and credit
conditions will remain tight. Such expectations help
explain why most CFOs expect corporates to reduce
debt levels and to maintain a strong focus on cost
control as the economy recovers.
With CFOs assuming that growth will be weak and cost
reduction a priority it is, perhaps, unsurprising that 85%
of CFOs think unemployment will rise through at least
the first year of the recovery.
The Deloitte CFO Survey: ConclusionsNo return to business as usual
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2
Deleveraging aheadIn June CFOs reported a further improvement in credit
conditions, taking them back to levels prevailing before
last Septembers collapse of Lehman. This marks a
significant improvement, and it suggests that government
action to stabilise the financial system is having an
effect. Nonetheless, the overwhelming majority of CFOs
still rate credit as being scarce and expensive. Nor are
UK corporates counting on a return to the easy credit
conditions that preceded the financial crisis. Indeed,
CFOs expectations that lending terms will remain tight
and credit availability reduced is fully consistent with the
experience in previous financial cycles.
Past financial crises have generally triggered a long
process of deleveraging across the economy, something
which continues even as growth recovers. The drive by
consumers and corporates to reduce debt levels reflects
an unwinding of credit boom excesses and a desire to
strengthen balance sheets. In addition, the private
sector almost always has to contend with much reduced
credit as banks themselves de-risk and de-leverage their
balance sheets.
CFOs assume these patterns will repeat in this cycle.
Some 80% of CFOs expect deleveraging to continuethrough the recovery. The proportion of CFOs planning
to reduce gearing in their own companies over the
next year outnumbers those planning to increase it by
two to one.
One little noticed aspect of the recession has been thesharp decline in corporate demand for bank financing
recorded by the Bank of Englands Credit Conditions
Survey. The Banks latest survey shows that credit
demand from corporates is declining more slowly.
But CFOs have become increasingly sceptical about
bank finance as a source of capital for their business
through the recession.
Yet if the banking system proves unable or unwilling
to meet the requirements of the corporate sector for
capital, where can corporates turn?
The CFO Survey shows that CFOs are increasingly
looking towards equity and bond markets for finance.
CFO sentiment about issuing equity and corporate
bonds saw the biggest ever increase in June, taking it to
the highest level since the Survey started in 2007. Equity
has emerged as the most popular form of finance
among CFOs and bank borrowing as the least popular,
a reversal of the situation in 2007 and 2008.
This combination of reduced debt levels and rising
equity issuance suggests that at least the early phase
of the recovery will be marked by falling corporate
gearing in the UK.
Contacts
Margaret Ewing
Partner and Vice Chairman
020 7303 3323
Ian Stewart
Chief Economist
020 7007 [email protected]
For additional copies of this report please
contact Matt Gentle on 020 7303 0294 or
email [email protected]
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The Deloitte CFO Survey No return to business as usual 3
Most CFOs, 73%, now expect the UK economy to
recover during 2010.
But a substantial minority, 23%, do not expect a return
to growth until 2011 or later.
CFOs views on the outlook broadly fit with those of
economists. After a huge downside shock to growth
expectations over the last year, economists now expect
the UK to see a weak recovery in 2010.
The average economist sees the UK economy growing
by 0.6% in 2010 following an expected 3.7%
contraction in GDP this year. This profile is consistent
with a resumption of quarterly growth later this year.
Economists have had to downgrade their growth
forecasts substantially in the last two years but in June
GDP forecasts for 2010 have edged up slightly.
Chart 1. Financial prospects
-60%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
2009 Q22009 Q12008 Q42008 Q32008 Q22008 Q12007 Q42007 Q3
Net % of CFOs who are more optimistic about financial prospects for their company now than
three months ago
22%
-30%
-59%
-53%
-19%
-9%
-24%
-4%
Lessoptim
istic
Moreoptimistic
Chart 2. CFOs views on the timing of the recovery
4%
73%
23%
Recovery later this year Recovery in the course of 2010 No recovery unt il 2011
or later
% of CFOs expecting a recovery in each period
Chart 3. Consensus forecasts for UK GDP growth
Source: The Economist
2007
2008
2009
2010
-4
-3
-2
-1
0
1
2
3
4
Mar 09Sep 08Mar 08Sep 07Mar 07Sep 06Mar 06
Evolution of consensus/average growth forecasts for the UK economy
CFOs have become much more optimistic about thefinancial prospects of their own companies.
In June CFO sentiment saw the biggest ever increase,
taking it to the highest level since the CFO Survey
started two years ago.
Recovery in sight?
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4
While CFOs think that the economy will recover, theyremain cautious about a revival in demand for their
own firms products and services. Most, some 59%, see
no revival in demand for at least another year.
CFOs believe that conditions for corporates will remain
difficult even as the economy recovers. The first year of
the recovery is expected to be very different from the
last years of the boom. There is no expectation of a
return to business as usual.
Most CFOs think that the recovery will be marked by
sluggish GDP growth and a strong focus on cost control
by corporates.
Risk aversion is expected to remain high among
corporates and 85% of CFOs believe unemployment
will rise for at least a year into the recovery.
80% of CFOs believe corporates will continue to reduce
debt levels, and a majority expect credit to remain in
short supply and credit conditions to remain tight.
CFOs clearly do not expect that the end of the
recession will herald an end to the problems of thecorporate sector.
Chart 4. When will growth in demand accelerate?
0%
5%
10%
15%
20%
25%
30%
35%
40%
2012 or beyond20112010 H22010 H12009 H22009 H1
% of CFOs who expect growth in demand for their companys products and services to
accelerate by
4%
16%
39%
25%
12%
4%
Chart 5. Beyond the recession
0% 20% 40% 60% 80% 100%
Falling house prices
Elevated levels of financial market volatility
Significantly reduced availability of credit
Elevated levels of risk aversion
Deleveraging
Rising unemployment
Tighter lending terms from banks
Sluggish GDP growth
Strong focus on cost control
% of CFOs who think corporates will face the following factors for a year or more beyond the
end of the recession
41%
63%
69%
79%
80%
85%
90%
91%
95%
No return to boom
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The Deloitte CFO Survey No return to business as usual 5
History suggests that credit conditions are likely to
remain tough for some time.
The Japanese and Swedish financial crises of the 1990s
were marked by several years of debt reduction.
The IMF expects that lending by banks in the major
industrial economies will continue to contract for at
least a further year.
Certainly debt is out of favour with UK CFOs, albeitslightly less so than last quarter.
50% of CFOs believe that UK corporate balance sheets
are overleveraged and 5% underleveraged, giving a net
balance shown in the chart of 45%.Almost half of the CFOs polled plan to reduce gearing
in their own companies over the next year.
Chart 6. Debt levels
Source: IMF Global Financial Stability Report, April 2009
50
100
150
200
250
300
20082005200219991996199319901987
Corporates
Financial
institutions
Households
Government
Ratio of debt to GDP among selected advanced economies (in percent, GDP-weighted, 1987=100)
Chart 7. Financial crises trigger deleveraging
Source: IMF Global Financial Stability Report, April 2009
70
80
90
100
110
120
130
140
1514131211109876543210-1-2-3-4-5-6-7-8-9-10
Sweden
(Peak 1992)
Japan
(Peak 1993)
Peak Years afterYears before
Bank credit to the private sector in Sweden and Japan before and after their crises
(percent of nominal GDP)
Chart 8. Leverage
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
2009 Q22009 Q12008 Q42008 Q32008 Q22008 Q12007 Q42007 Q3
Net % of CFOs who think UK corporate balance sheets are overleveraged
35%
60%
45%
24%27%
6%
-17%
-27%
Overleveraged
Underleveraged
While financial conditions have improved in recentmonths, one of the underlying causes of the crisis,
excess debt, remains. This explains the widespread
expectation that a process of deleveraging lies ahead,
particularly for financial institutions and households.
Deleveraging ahead
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CFOs have become increasingly bullish on M&A activity,a development that fits with an improved economic
outlook and still-depressed asset valuations.
This quarter saw the biggest ever increase in CFO
optimism on M&A, taking it to the highest level since
the survey started in September 2007. Sentiment about
private equity activity has also turned positive for the
first time in two years.
This chart provides perhaps the most graphic illustration
of the evolution of the credit crunch over the last two
years.
2007 and 2008 saw a major deterioration in the cost
and availability of credit to corporates.
Those trends have partially reversed since the start of
the year. Credit conditions remain tough, but they are
better than in the aftermath of the failure of Lehman
last autumn.
It is useful to contrast CFOs financial attitudes with
banks views as measured by the Bank of Englands
Credit Conditions Survey.
The latest survey shows that banks have increased
credit availability, a finding that cross-checks with the
CFO Survey.
Credit demand is contracting more slowly, but the CFO
Survey suggests that corporates have become more
sceptical of the merit of bank financing.
Chart 9. M&A and PE outlook
-80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
2009 Q22009 Q12008 Q42008 Q32008 Q22008 Q12007 Q42007 Q3
Net % of respondents who expect M&A and PE activity to increase in the next 12 months
-44
-72
-22
-50
13
1
-9
22
-27
16
-5
42
19
81
-61-67
Willincrease
Willdecrease
M&A activity PE activity
Chart 10. Cost and availability of credit
Cost of credit (lhs)
Availability of credit (rhs)
Creditis
costly
Creditischeap
Net % of respondents reporting credit is costly and credit is easily available
Creditis
available
Creditishardtoget
-100%
-80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
-100%
-80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
2009 Q22009 Q12008 Q42008 Q32008 Q22008 Q12007 Q42007 Q3
Chart 11. Credit demand/supply: UK banks views
Source: Bank of England Credit Conditions Survey
Bank credit available
to corporates
Demand for credit
from corporates
-60
-50
-40
-30
-20
-10
0
10
20
Jun 09Mar 09Dec 08Sep 08Jun 08Mar 08Dec 07Sep 07Jun 07
Optimism on M&A
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The Deloitte CFO Survey No return to business as usual 7
CFOs have become less enthusiastic about bank
financing and are increasingly looking to the bond and
equity markets for capital.
CFO sentiment about issuing debt and equity saw the
biggest ever improvement in June taking it to the
highest level since the Survey started.
The 2009 Q1 Survey showed that CFOs believe that in
future corporates are likely to rely more on equity
finance and less on debt finance. The second quarter
Survey confirms CFOs are increasingly willing to
contemplate issuing equity.
Official data show that a major change is already
underway. Net bank borrowing has collapsed in the UK
in the last year, while net equity issuance has turned
positive after several years of declining issuance.
Chart 12. Favoured source of corporate funding
Equity issuance
Bank borrowing
Bond issuance
Attractive
Unattractive
Net % of respondents reporting the following sources of funding as attractive
-60%
-40%
-20%
0%
20%
40%
60%
2009 Q22009 Q12008 Q42008 Q32008 Q22008 Q12007 Q42007 Q3
Chart 13. Good time to issue debt/equity?
-100%
-80%
-60%
-40%
-20%
0%
20%
2009 Q22009 Q12008 Q42008 Q32008 Q22008 Q12007 Q42007 Q3
Net % of respondents who think now is a good time to issue debt/equity
-63
-71
-88
-75 -76-80
-90-92
-84
-76
-64
-49
-33
3
-69-69
Good
time
Notagood
time
Equity Debt
Chart 14. Source of funding
Source: Bank of England
Net bank borrowing
Net equity issuance
-2,000
-1,000
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
200920082007200620052004
Net equity issuance by UK corporates vs net bank borrowing 12 month moving average (in m)
The credit crisis has triggered a shift in CFOs preferencesfor sources of financing for their businesses.
In 2007, before the crisis really hit, CFOs had a strong
preference for bank borrowing and an antipathy to
equity finance.
But this year bank borrowing has moved out of favour
and equity has emerged as the most popular form of
finance. In June corporate bond issuance moved ahead
of bank borrowing in terms of popularity for the first
time since the Survey started.
Equity is back
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A note on methodologyMany of the charts in the Deloitte CFO Survey show the results in the form of a net balance. This is the percentage of respondents reporting, for
instance, that bank credit is attractive less the percentage saying bank credit is unattractive. This is a standard way of presenting survey data used
by, amongst others, the CBI and the European Commission. To aid interpretation of the results, this table contains a full breakdown of responses
to most of the regular questions covered in the CFO Survey. Due to rounding answers may not sum to 100.
Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009
% % % % % % % %
How would you rate the overall availability of new credit for corporates?Available 42 26 31 16 5 1 2 13
Neutral 10 19 6 7 6 0 4 15Hard to get 48 55 63 77 89 99 94 72Net balance -6 -29 -31 -61 -84 -98 -92 -59
How would you rate the overall cost of new credit for corporates?
Costly 59 64 72 89 97 95 86 82Neutral 22 26 25 10 2 4 11 15Cheap 20 10 3 1 1 1 3 3
Net balance 39 55 69 88 96 94 83 79
Bank borrowing, as a source of funding, is Attractive 73 44 59 47 35 29 27 27Neither attractive nor unattractive 12 28 16 13 14 9 12 22
Unattractive 16 28 25 40 51 62 61 50Net balance 57 16 34 7 -16 -33 -34 -23
Corporate bonds, as a source of funding, areAttractive 55 33 28 40 14 20 22 35
Neither attractive nor unattractive 18 33 19 29 17 14 23 32Unattractive 27 33 53 31 68 66 55 34
Net balance 27 0 -25 8 -54 -46 -33 1
Equity raising, as a source of funding, isAttractive 26 19 19 29 17 21 27 44Neither attractive nor unattractive 24 33 9 20 24 13 28 26
Unattractive 50 48 72 51 58 66 45 30Net balance -24 -29 -53 -22 -41 -45 -18 14
UK corporate balance sheets areOverleveraged 4 5 13 32 33 38 63 50
Appropriately leveraged 65 73 81 61 61 59 34 44Underleveraged 31 22 6 7 6 3 3 5
Net balance -27 -17 6 24 27 35 60 45
Cash return to shareholder ratios (including share buybacks) areHigh 41 35 32 17 15 25 15 9Normal 49 60 52 56 39 26 13 22
Low 10 5 16 27 45 49 72 68Net balance 31 30 16 -10 -30 -24 -57 -59
In a years time, FTSE 100 will beHigher 45 30 50 40 49 66 65 62
Broadly unchanged 33 40 25 33 35 26 23 34Lower 22 30 25 28 16 8 12 4Net balance 24 0 25 12 33 58 53 58
Levels of M&A in the UK willIncrease 14 21 31 38 48 40 56 83No change 12 14 16 26 27 36 29 15Decline 75 65 53 37 26 24 15 2
Net balance -61 -44 -22 1 22 16 41 81
Volume of acquisitions by private equity in the quoted equity market willIncrease 14 12 22 32 31 20 29 40No change 6 5 6 23 30 33 37 40
Decline 80 84 72 45 39 47 34 21Net balance -67 -72 -50 -13 -8 -27 -5 19
Compared with three months ago how do you feel about the financial prospects for your company?More optimistic 26 17 22 17 3 7 15 37
Unchanged 44 43 47 47 41 27 40 49Less optimistic 30 40 31 36 56 66 45 15
Net balance -4 -24 -9 -19 -53 -59 -30 22
Data archive
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Equity has emerged as the most popular formof finance among CFOs and bank borrowingas the least popular, a reversal of the situation
in 2007 and 2008.