A widening gap is emerging between cash-rich businesses and those desperately in need of capital, which is setting the stage for a bifurcated economy, between the cash haves and have-nots, according to a new study.
Ajit Kambil, global research director of Deloitte's CFO Program, says competition for capital will intensify as over $11.5 trillion of financing will be due in the next five years, likely limiting the availability of debt capital.
For companies with significant leverage, CFOs need to consider moving with urgency to convince boards and CEOs to recapitalize, he says.
Kambil sat down with Business Finance to discuss the findings from Deloitte's new study, A Tale of Two Capital Markets, which explores the looming worldwide debt picture and how capital is now a powerful competitive asset for those that can raise it quickly.
BF: What were some of the findings that jumped out to you from this study?
AK: What struck me was there was a heart attack with the financial crisis, where everybody pulled back and had to scramble. It left some companies far worse off than others. What is happening now is we're going into a period with literally unprecedented levels of debt coming due and the cost and access to capital is now becoming a real strategic variable.
Prior to 2007 and 2008, for many of the largest companies in the world, access to capital was not an issue until something was horribly wrong. What it really does is constrain the degrees of freedom companies have if they're leveraged and trying to compete in any growth phase. Capital is going to be less available and more costly to those companies.
BF: In this study, you refer to the demand and supply of capital for debt financing as a new context for business. Can you explain that in greater detail?
AK: The new context is that capital is much more of a strategic variable than it was three years ago. And therefore in this new context, what it allows those companies with very good cash flows and good balance sheets to do is out-business their competitors that do not have a good balance sheet and have higher leverage.
They're able to do so because they can acquire capital at a cheaper cost than their competitors, perhaps out-acquire companies for growth more cheaply than others and still get good deals on acquisitions in the marketplace.
BF: Is this a recipe for the biggest fish to get bigger?
AK: There is certainly an opportunity for some of the larger companies to get larger, but we've also seen many M&A deals become train wrecks in the past. The large can get larger if they successfully execute on their strategies for growth. That could be through mergers and acquisitions, global expansion, and if they're able to pull off organic growth through innovation. But it's still contingent on executing, and that's by no means certain.
BF: The study reveals a widening disparity. Where specifically are you finding capital unevenly distributed?
AK: Well, we decided to follow the money and what we found was in sectors outside financial services, the consumer sector has a lot more debt coming due than some of the other industries. What that suggests is you might find consolidation in some of the consumer product sectors—those are going to be the companies that have a challenge of refinancing and they're going to have to demonstrate growth and cash flows that will support the confidence of their investors.
BF: What role does government debt play in this growing competition for capital?
AK: We all know government debt is very high here in the U.S., but it's also high in other parts of the world too. We haven't fully figured out to what extend sovereign debt needs are going to add to crowding out the available capital to the private sector. We just don't have a great handle on that.
One of the things that surprised us during this study was the patterns of debt were pretty similar worldwide. Asian companies actually have the highest proportion of outstanding debt maturing. They have 69 percent coming due in the next five years. We don't often hear that out here. We hear about U.S. companies and their challenges.
The issues about debt financing are much more similar worldwide than we anticipated. While the magnitude of debt is the greatest in the U.S., for the Asian companies that have debt coming due, they're going to have to figure that out quickly and efficiently.
BF: What opportunities do CFOs have now that need to be taken advantage of?
AK: This is a great moment to sort of arm up and raise some capital. I think it's more incumbent on boards and CEOs and CFOs to have a conversation now than to have it one year or two years from now. If you can, raise the capital now, because fortunately for many companies, there's been a lot of capital made available at quite low interest rates because some of the policies of the central banks. Many of the central bank rates are at close to historic lows. It's not likely that can be sustained over a period of time. If that changes, the cost of capital will go up. If you're able to lock things in early, you will have a capital cost advantage, which is not insignificant. Even a hundred basis points can make a lot of difference.