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RBC Capital Markets survey: Corporates look towards growth but major fundraising plans still on hold

London, New York, Toronto, 6 July 2010—  Corporates expect economic growth to resume over the next two years, but major fundraising plans are on hold as caution still reigns over corporate strategy, according to a survey of 440 senior financial and non-financial executives conducted by the Economist Intelligence Unit and commissioned by RBC Capital Markets, the corporate and investment banking arm of Royal Bank of Canada (RY on TSX and NYSE).

Demand for funding is low today, with just 38 per cent of corporate respondents expecting to raise fresh capital in the next two years, although there is a gradual return to M&A activity, private equity deals, project finance activity and IPOs. Private equity (37%) and syndicated loans (35%) are expected to be among the most popular choices for raising debt or equity, followed by investment-grade debt (25%), secondary equity offering (14%), securitisation (14%) and IPOs (11%). Smaller corporates (USD 75m - USD 250m in annual revenues) are most likely to be raising "significant" amounts of capital (20% vs. 8% for larger firms).

  • Transaction activity outlook: Respondents see M&A activity as the area where an increase in transaction volumes is most likely (49%), compared to 12 months ago, followed by an increase in IPOs (31%). Financial institutions are more optimistic than their corporate counterparts about transaction volumes in their country over the coming year. For example, 49 per cent of financial institutions expect that IPO levels will be higher, compared to 38 per cent of corporate respondents. Financial institutions executives also expect higher levels of activity than their corporate counterparts for secondary equity offerings (53% vs. 27%); M&A (61% vs. 52%) and investment-grade debt (46% vs. 31%).

  • Threats to fundraising: Economic uncertainty in key markets is seen as the greatest risk to fundraising activity (39%), followed by political uncertainty (13%), currency volatility (12%), difficulty in obtaining financing (12%) and risk of default by key customers (11%).

    Only five per cent of corporates see new regulatory challenges as a risk to their funding plans, despite the impact that higher capital and liquidity requirements on financial institutions will have on reducing bank lending, thereby leaving corporates with limited options for raising capital.

  • Cash is king? Caution over fundraising plans has led many corporates to increase their cash reserves, which may be used to fund transaction volumes or simply return money to shareholders. While investors once frowned on companies hoarding cash, many now recognise the benefits of significant cash reserves. In evaluating investments, the criteria that financial executives most often say they value more than they did two years ago are a company's financial strength (59%), its ability to maintain adequate levels of cash or other sources of liquidity (49%) and its ability to mitigate the risks of extreme market conditions (49%).

  • Changes to strategy: Despite a scaling back of funding plans over the past nine months, corporates have adjusted their business strategy to allow them to improve their chances of accessing capital. In particular, executives from financial institutions place restructuring of business operations at the top of initiatives aimed at improving access to capital, followed by strengthening of corporate governance and a greater focus on investor relations. Corporates have instead seen a greater focus on core customers and shareholders.

  • Focus on emerging markets: Nearly two-thirds of executives say that there will be a 'greater' or 'much greater' focus on business in overseas emerging markets, compared to domestic markets and overseas developed markets. European corporates are more likely to tap into overseas emerging and developed markets, compared to North American corporates who are more likely to focus on their domestic market.

  • Cross-Atlantic Differences: While financial institutions in both Europe and North America are similarly upbeat about the level of M&A and IPO transactions, corporates in North America are significantly more optimistic (37% vs 28% in Europe). Similarly, 40 per cent of corporates in North America expect higher levels of IPO activity, versus 31 per cent of corporates in Europe. While the number of corporates expecting higher levels of secondary equity offering is relatively low in both markets, corporates in North America are more optimistic than their European counterparts (27.7% vs. 18.5%).

    Although global demand for funding is low, corporates in North America are more likely to go to the market to raise fresh capital than their European counterparts (41% vs. 31%). European corporates are more likely to use investment-grade debt (28%), syndicated loans (24%), private equity (20%), securitisation (16%) and secondary equity offering (16%). By contrast, North American corporates expect their funding to come from private equity (45%), followed by investment-grade debt (30%), IPO (11%), secondary equity offering (11%) and securitisation (11%).

Commenting on the findings, Doug Guzman, Head of Global Investment Banking, RBC Capital Markets said: "As economic growth in the major economies resumes, we expect a more positive environment for deal making and fundraising activities. Corporates and financial institutions entering the market will undoubtedly face greater competition for limited capital. They will increasingly need to market themselves in a way that makes them attractive to bondholders and shareholders alike, while at the same time competing for capital with sovereigns which may offer wider spreads. In this environment, the ability of corporates to part-fund their own transactions through cash reserves will be extremely attractive to banks, who are increasingly looking to reduce their exposure to risk."

Stephen Walker, Head of Corporate and Institutional Banking, RBC Capital Markets, said: "Macro-economic uncertainty has played a key role in falling corporate loan demand over the past two years. While a normal cyclical phenomenon, the drop in demand this time has been far sharper than in previous cycles and comes at a time when banks have been looking to bolster their revenues through increased lending. Despite the loan demand/supply imbalance that results from this, loan spreads have continued to be relatively wider across most market segments, with differentiation in pricing for similarly rated credits becoming more idiosyncratic and more dependent on industry, geography, and loan size.

"Against the backdrop of government deficits and regulatory change in the financial world, there is no doubt that the next several years will be a vitally important time for the structure and substance of credit markets. The range of funding options is likely to become narrower and more expensive as banks face higher capital and liquidity requirements. Importantly, this will come at a time when corporations are faced with increased competition for capital from banks and sovereigns."


Media Enquiries:

Europe and Asia:
Beverley Weber,
+44 (0)20 7029 7685, Beverley.Weber@rbc.com

North America:
Kevin Foster,
+1 (212) 428-6902, Kevin.Foster@rbccm.com

About the survey
RBC Capital Markets commissioned the Economist Intelligence Unit to survey 440 senior executives from around the globe (North America (34%), Europe (41%), Asia Pacific (16%) and Rest of the World (9%), including both clients and non-clients of the firm, on their outlook for the future of capital markets. The survey was conducted between April 28 and May 25, 2010. The respondents included 229 senior executives from commercial and investment banks, hedge funds and private equity firms and 211 executives from non-financial companies active in the capital markets.

About RBC Capital Markets
RBC Capital Markets is the corporate and investment banking arm of RBC and is consistently ranked among the top 20 global investment banks. With over 4,000 employees, RBC Capital Markets is active globally in fixed income, foreign exchange, infrastructure finance, ECM, metals, mining and energy. Working with clients through operations in Asia and Australasia the UK and Europe and in every major North American city, RBC Capital Markets provides capital markets products and services from 75 offices in 15 countries. RBC Capital Markets international fixed income and treasury businesses are managed from London, which is the centre of a 24-hour trading platform, with major hubs in Sydney, New York and Toronto. For more information, please visit www.rbccm.com

About RBC
Royal Bank of Canada (RY on TSX and NYSE) and its subsidiaries operate under the master brand name RBC. We are Canada's largest bank as measured by assets and market capitalization, one of North America's leading diversified financial services companies and among the largest banks in the world, based on market capitalization. We are one of North America's leading diversified financial service companies, provide personal and commercial banking, wealth management services, insurance, corporate and investment banking and transaction processing services on a global basis. We employ approximately 77,000 full- and part-time employees who serve more than 18 million personal, business, public sector and institutional clients through offices in Canada, the U.S. and 53 other countries. For more information, please visit www.rbc.com.


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