Intense competition for capital in the market may cause major problems for businesses when they try and renew their debt financing this year. $2 trillion* of loans need to be rolled over globally, with $250bn of investment grade funds needing to be refinanced across the EMEA region in 2012**, PwC comments.
Investment professionals have warned PwC that companies which fail to make their cash and debt disclosures clear and accessible may find it more difficult to raise capital or borrow funds at this critical time. There will be a tug-of war for capital in the market and management teams may find they can't refinance on the terms they have been used to.
Five-year loans that were struck during 2007 are now up for renewal, and the increasingly tight market conditions will cause lenders to take a much tougher stance, PwC says.
'Companies have already found their business models under increasing scrutiny from regulators and investors. In the current climate, a failure to show clearly their underlying cash and debt positions could be the difference between sinking or swimming. Businesses need to be crystal clear if they want their lenders to 'play ball' instead of hardball. If companies want to be bankrolled in this financial environment, good disclosure is essential', stated John Webster (photo), Assurance Leader, PwC Romania.
PwC has reviewed the latest annual reports from the FTSE 100 for three of investors' most commonly cited building-blocks of good voluntary disclosure around cash and debt:
Only 55% of the FTSE100 provide a sufficiently detailed net debt reconciliation for investors to be able to understand with any certainty why cash balances have moved over the year.The detail provided in the debt maturity schedule of the FTSE 100 means that in only 38% of cases could investors figure out how much debt has to be repaid in each of the next 5 years. 48% of companies do not simplify their cash flow statements so that investors can find the numbers they need without referring to complex reconciliations in the notes. One investor says 'Understanding cash flow reporting is like a doing a jigsaw with half the pieces and without the box.'
Of the FTSE 100 companies with debt, only 12% included all three of these key building-blocks.
PwC's Investor view, 'How to win the competition for capital', outlines key areas that investors would like to see companies disclose and the frustrations they have with current reporting.
Investors have red-flagged three key areas where management can make small changes to disclosures that would improve their chances of successfully competing for dwindling funds:
Cash, allowing investors to understand management's ability to service the debt;
Net debt reconciliations, allowing them to see how financing has changed over the year;
Debt, allowing them to understand the future funding needs of the business.
Richard Sexton, regulatory affairs and public policy board member, PwC said:
'2012 is set to be a tough year for companies as the financial storm that is buffeting the capital markets continues to rage. This has created a tougher lending environment. The lending conditions of 2012 are very different to those before the crisis and the Romanian companies planning to refinance their debt in 2012 should consider the analysts comments regarding the need for transparency and clarity in disclosures, otherwise risk their chances of success' concluded Webster.
*Source: Standard & Poor's
**Source: BIS
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