Credit Crisis Impact on Corporates (AFP Research)

by Erin McCune on October 1, 2008

in AFP, Current Events, Economic Outlook, Research Round Up, Treasury & Cash Management

The Association of Financial Professionals just published research on short-term credit access for corporates. The survey was originally
conducted in early September and was supplemented by a shorter
survey conducted in last week to reflect evolving market
conditions.

Highlights:

The recent turmoil in the financial markets has had a direct impact on
the ability of organizations to access short-term credit. As a result,
companies are hoarding cash and taking defensive actions, including
reducing capital spending, freezing hiring, considering layoffs, and
delaying payments to their suppliers.

"The most pressing issue for businesses is access to credit," said Jim Kaitz, President and CEO of AFP. "This survey is evidence that inaction by either Congress or regulators will have severe consequences on Main Street."

A supplemental survey conducted in the past week documents a dramatic, sudden tightening of credit markets with immediate impact on U.S. businesses. Forty percent of finance executives report that their organizations have less access to short-term credit than they did one month ago, with 16 percent reporting significantly less or no access to short-term credit. As a result, 62 percent of finance executives report that their organizations have already taken defensive actions. These organizations have:

  • Moved all or most of short-term investments to bank deposits and U.S. Treasuries (41 percent)
  • Reduced capital spending (37 percent)
  • Shortened the duration of their investment portfolios (29 percent)
  • Frozen or reduced hiring (26 percent)
  • Drawn on existing credit facilities to build cash (26 percent)
  • Considered staff reductions or layoffs (22 percent)

Finance executives report that these defensive actions will become more widespread if credit access does not improve by year end. Organizations that continue to have reduced access to short-term credit at year end are likely to:

  • Reduce capital spending (61 percent)
  • Freeze or reduce hiring (42 percent)
  • Draw on existing credit facilities to build cash (33 percent)
  • Tighten credit standards for trading partners (27 percent)
  • Consider staff reductions or layoffs (26 percent)
  • Reduce current or planned inventory levels (23 percent)
  • Delay payments to vendors (18 percent)

As recently as early September, finance executives reported little change in their access to short-term credit over the past two years, with nearly half of organizations reporting no impact on their access to credit, and approximately equivalent percentages of companies reporting an easing (24 percent) or tightening (28 percent) of short-term credit. At that time, only two percent of companies reported that access to credit had caused any form of business contraction.

Finance executives report that secured lines of credit (60 percent), unsecured lines of credit (59 percent), commercial paper (26 percent), and asset securitization (25 percent) are the most critical forms of short-term financing to their organization. Even before the events of September, these same financing instruments were the ones that were most adversely impacted by the credit market disruptions. Finance executives reported a moderate or sharp decrease in access to unsecured lines of credit (24 percent), secured lines of credit (17 percent), commercial paper (12 percent) and asset securitization (9 percent).

Download the 2008 AFP Short-Term Credit Access Survey here.

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