Debt capital markets have seen a significant uptick in popularity among corporates seeking credit over the past year, but still remain out of reach for many businesses, according to new research.
While bank debt remains the biggest segment of debt provision at 46%, debt capital markets (DCMs) have grown their share to 34%, up from 27% in 2021. Private placements have grown from 11% to 16% of debt funding.
The news comes in the 2023 Corporate Debt and Treasury Report, compiled by Herbert Smith Freehills with the Association of Corporate Treasurers.
However, even as debt capital markets grow in popularity there is a warning in the report that they continue to remain unavailable for many corporates.
“Where corporates have access, the DCM markets will likely make up the largest share of debt in terms of the quantum but the pre-conditions which apply to access that market mean that it remains out of reach for many,” the report says.
Banks have been managing a period of turbulence following rising inflation and hikes in central bank rates to record levels.
March saw at least three bank failures in the US amid worldwide concern that a financial crisis might follow. May saw another US bank, First Republic, closed and sold.
The debt report says some respondents to the survey offered warnings about an “over reliance on bank debt” and the assumption that it will always be available, and in the amounts, when needed. Respondents said bank collapses were “a reminder to ensure proactive management of bank exposure (both as deposit takers and as credit providers).”
The survey found that the increased cost was the most likely obstacle to raising debt, up dramatically from 45% of respondents saying this was the case last year to 79% this year. Despite increasing costs, 47% of respondents expect to raise debt levels to their highest levels in five years.
Working capital will be the likely driver, in particular where corporates find it impossible to pass on cost to customers or where there is a need to “cover supply chain inefficiencies”.
And while sustainable finance and ESG remain the biggest topic in corporate treasury, the number of companies reporting they have a ‘sustainability framework’ has dropped from 29% to 26%, while those who have entered into sustainable finance has dropped from 20% to 18%.
“This seems to suggest a stalling in what many had anticipated would be a persistent continual upward trend for sustainable finance,” says Kristen Roberts, joint managing partner of the finance practice at Herbert Smith Freehills. “Even so, it remains the case, as it was last year, that ESG and sustainable finance is the topic of conversation in corporate treasury circles and is likely to be discussed in any financing.”
He adds that the financial landscape with its increased cost of credit may cause treasurers to question the role of debt financing in sustainability. “Some treasury teams are challenging the role of debt financing in driving the sustainability agenda in light of the need to get financings done in the current environment.”
The report, Corporate Debt and Treasury Report 2023, can be found here.
Gavin Hinks is a freelance business and finance journalist
