We recently surveyed CFOs of 540 companies in the US, and nearly 800 in Europe and Asia, to gauge the status of credit markets and the world economy. About one quarter of companies has been severely impacted by tight credit markets, and another third has been moderately affected. These financially constrained companies are in a troubling position because they for the most part have negative earnings and have seen their cash holdings shrink on average by about one-fifth over the past year. Finding credit is difficult for them, and when a loan can be secured, the interest rates and fees are high.
If these financially constrained firms are losing money, their cash is disappearing, and they can not borrow on favorable terms, what can they do? More than 80 percent have had to postpone or cancel valuable investment projects due to credit tightness. Half have sold assets just to fund their remaining operations. When they do obtain funding, these companies draw heavily on their bank credit lines, rather than using lines as short-term funds or as a bridge as intended. For these companies, credit market conditions have worsened during 2009, despite the historic efforts of the central bankers and Treasury Department. Moreover, many of these firms indicate that they will need to borrow before year-end, though it is not clear whether lenders will be willing to provide them funds.
But not all companies are in such dire straights. Among the 40 percent of companies that say they have been largely unaffected by the credit crisis—mainly those that have remained profitable and retained a good credit rating—four out of five have found stable or improved credit conditions during 2009. These stronger companies are able to borrow and the fees and rates they pay have not increased. These firms have been able to build up their cash reserves this year, and they are not leaning heavily on their available lines of credit. While these companies are cautious about their hiring and capital spending plans, the cuts they have made are not as severe as those at the troubled firms. Overall, these strong companies have been able to tread water as the economic turmoil has raged, and they are hunkered down and appear able to ride out the rest of the storm. It is on the backs of these companies that the economic recovery will ride when it starts.
The great risk for the economy, as we see it, is that the liquidity crisis among troubled firms continues unabated, with the banking system not willing to aid them, in large part because they are troubled. Should this scenario play out, the second half of 2009 might be worse than the first half.
But even for these weaker companies, one glimmer of hope is that the majority have been able to negotiate more favorable terms (reduced prices, delayed payments) with their suppliers. While helpful to the weak firms, of course, this does shift some of the burden to their suppliers.
Two other pieces of good news. First, CFO optimism is up from last quarter’s record lows. While still below the long-run average optimism, this leading indicator is moving in the right direction, which bodes well for early 2010. The majority of CFOs say that they believe a recovery will be underway as 2010 begins. Second, an internal recovery is occurring in Asia, not dependent on the West. For example, in China, a majority of companies report an increase in orders from other Chinese firms. With this important part of the world economy stabilizing, export demand for goods produced in the US and Europe should in time increase, aiding a 2010 recovery in the West.
John Graham is the D. Richard Mead Jr. Family Professor of Finance at Duke University’s Fuqua School of Business
Kate O’Sullivan is a Senior Writer at CFO Magazine
Each quarter the Duke University / CFO Magazine Global Business Outlook Survey polls thousands of chief financial officers around the world. The most recent survey reflects the views of 1,309 CFOs in the U.S., Europe, and Asia. The survey has been conducted 53 consecutive quarters. See http://www.cfosurvey.org for more details.