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