Cash hoarding by corporates may be coming to an end
Fitch Ratings survey of European fixed income investors predicts companies will loosen their "purse strings" and spend cash on M&A, dividends and capex, but credit conditions are set to remain tight for SMEs.Fundamental credit conditions are likely to stay the same for companies in most industry sectors, but SMEs look set to bear the brunt of the pain in terms of credit remaining tight.
According to Fitch Ratings' Q1 2011 survey of fixed‐income investors across Europe, 64% expect commercial bank lending conditions to remain "moderately tight" for SMEs compared to just 46% for investment-grade companies and 44% for emerging market companies. Only 29% expect lending conditions will loosen moderately for SMEs, while 49% expect standards to loosen moderately for investment grade corporates and 46% for emerging market corporates.
Since the credit crisis, companies have been hoarding cash on their balance sheets, but according to Fitch's survey that trend could be coming to an end as investors expect corporates to loosen their purse strings and reduce their focus on paying down debt in favour of capital expenditure, dividend payments, share repurchases and M&A. Seventy percent of firms expect moderate use of cash on capex in the next 12 months, followed by 68% that expect moderate use on dividends and 53% on M&A.
Access to funding, not regulation, was highlighted by 49% as a critical risk to banks' credit quality in the coming 12 months, however, regulation is also of increasing concern to investors in bank fixed income, with 84% highlighting indicating it was a "critical" or "important" factor.
Image provided by Scott Chan.