Deloitte CFO survey: Debt falls out of favour with UK finance chiefs 

Ian Stewart, chief economist at Deloitte

AGAINST a backdrop of elevated interest rates, Deloitte’s Q3 CFO survey shows finance leaders continuing to focus on defensive balance sheet strategies. UK CFOs now rate bank borrowing as being more unattractive as a source of corporate financing than at any time since the survey began, with a net -37%1 rating it as attractive.

Despite this, levels of business confidence rose in the third quarter and are running slightly above average, with a net 9% feeling more optimistic about the financial prospects for their company than three months ago.

Conducted between 19 September and 2 October 2023, the survey captures sentiment amongst the UK’s largest businesses. A total of 70 CFOs participated, including the CFOs of 13 FTSE 100 and 26 FTSE 250 companies. The combined market value of the 43 UK-listed companies surveyed is £345bn, or approximately 14% of the UK quoted equity market.

Sources of financing

CFOs’ attitudes to financing their businesses have shifted and they now see equity financing (net -10%) as being more attractive than debt financing, either in the form of bank borrowing (net -37%) or corporate bond issuance (net -39%). Between 2009 and the start of this year, finance chiefs have rated equity ahead of both bank borrowing and corporate bond issuance in only one quarter (Q2 2009). 

CFOs have also become more cautious about taking on debt, with a net balance of 15% seeing UK corporates’ balance sheets as being overleveraged. Debt reduction is rated as a strong priority at 30%, the highest level recorded outside of the exceptional circumstances during the early stages of the pandemic.

Ian Stewart, chief economist at Deloitte, said: “Higher interest rates have flipped a decade-old consensus which was previously in favour of debt finance. This shift in thinking means that equity finance, which has been out of favour for years, is now seen as being more attractive than debt finance.

“Finance leaders are preparing for a period of high interest rates, with predicted rates falling only slightly over the next year. If realised, this would represent a period of tight monetary policy, the likes of which has not been seen since 2008.”

Credit squeeze continues

The survey shows that availability of credit saw a modest decline this quarter to a net -12%, but remains significantly higher than during the global financial crisis. The cost of new credit for corporates remains close to the highest level seen since the global financial crisis, at a net 84%.

Cost reduction (54%) and increasing cash flow (43%) continue to top the corporate priority list for finance chiefs, while they reported that they are making greater efforts to reduce leverage, with 30% rating it as a strong priority.

CFOs, on average, see the Bank of England’s base rate falling only slightly from its current level of 5.25% to 4.75% in a year’s time. This is consistent with market expectations that the UK is at or close to the top of the interest rate cycle.

Outlook for inflation

Geopolitical risk,2 higher inflation, and the prospect of further interest rate rises continue to be seen as the most significant sources of external risk facing businesses,3 whilst concerns around labour shortages and disruption to energy supplies have eased. CFOs ranked the risk of higher inflation at 58,4 the second highest risk to business. 

Although inflation may have peaked for this cycle, CFOs expect inflation to be running at 3.1% in two years’ time, above the Bank of England’s expectation. They also think wage growth is likely to slow over the next 12 months from 6.2% to 4.3%.

Firms’ operating costs have risen in the last 12 months, and 84% expect them to continue to increase in the next year. Reducing cost continues to be rated the highest corporate priority in the next 12 months, with 54% rating it as a strong priority for their business.

Opportunities in climate transition and AI

CFOs view government policy as the biggest driver of their firm’s own response to climate change (with a rating of 47)5 followed closely by customers (46) and employees (42).

58% of CFOs believe their businesses will face significant or wholesale change in the move to a low-carbon economy in the next 10 years, with only 4% seeing little or no change. The vast majority (82%) continue to see opportunities for their own businesses in the transition to a low-carbon economy.

Finally, most CFOs (54%) have become more optimistic that AI can deliver improvements to business performance. 86% reported that their understanding of AI and its uses has increased.

Ian Stewart said: “New technology and the transition to net zero will reshape the economy and play a major role in driving growth. Finance leaders believe that the application of artificial intelligence will lift productivity and that the energy transition will create significant business change and new business opportunities.” 

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