Funding under pressure

Global businesses face funding challenge

Companies could struggle to finance continued earnings growth given the constraints in credit markets, according to a new study published by Allen & Overy.

Companies around the world are going to have to get creative to fund their ambitious growth plans during the next two to three years, suggests a study released today by Allen & Overy, a global law firm headquartered in London. Asia will meet some of the demand, but finding the rest could be a challenge.

Worldwide, 48% of the respondents surveyed by Allen & Overy and YouGovStone, a market research firm, said they expected their need for finance to increase and 45% said they expected the availability of finance to also increase. Such confidence in the availability of funding might reflect hope more than honest expectation.

“The survey results pose an interesting conundrum for the world's business leaders — a growing appetite for more funding options against a somewhat alternative reality in terms of what funding will be available in these challenging market conditions,” said Tom Brown, Asia-Pacific managing partner at Allen & Overy.

In Europe, exposure to sovereign debt, the looming capital requirements of Basel III and the prospect of more restrictive regulation are all weighing on the availability of credit. Contrast that with the picture in Asia, where banks are mostly not subject to Basel III and are enjoying the effects of strong local currencies and limited exposure to the eurozone.

The region’s abundant liquidity is not lost on executives elsewhere in the world, with 54% of respondents saying they are more likely to source funds for their major financing needs in Asia-Pacific during the next five years.

“Asian institutions and markets are ideally placed to brave the tough climate by introducing new products and assisting the global corporate elite in capitalising on the opportunities as and when they present themselves,” said Brown.

The growing offshore market for renminbi funding is just such an example, with 50% of businesses saying they expected to tap dim sum funds within the next five years. By the same token, Asian borrowers are also looking for new funding opportunities. For example, 31% of respondents in China, 30% in India and 20% in South Korea said they are more likely to source finance from Africa in the near future.

Even so, the US will also maintain its importance as a funding centre for the world’s top companies. Among respondents in Asia-Pacific, 59% said the US dollar will still be the most important currency for international trade by 2020. The bulk of respondents also expect the New York Stock Exchange to remain the world’s most important exchange, followed by Shanghai, which the survey predicts will surge in importance to the become the world’s second most important exchange.

Where business leaders expect to source funding (click to see bigger image)

Markets can play a role in meeting companies’ funding expectations, but the outcome of this global dash for cash will probably depend on whether governments and central bankers can resist the urge to start trade wars.

“Business people now are quite used to the idea of accessing credit anywhere in the world with the result that cross-border links are likely to increase,” wrote Philip Wood, special global counsel at Allen & Overy, in a foreword to the report. “The greater interdependence must give pause for thought as to whether this will lead to collisions or harmony.”

It would take another dollop of optimism to expect a smooth road ahead.

In compiling the report, titled 50 Degrees East: Under pressure: Funding options in an uncertain world, Allen & Overy conducted research among more than 1,000 business leaders from large international companies across 19 countries.

¬ Haymarket Media Limited. All rights reserved.
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