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We are part of a global financial institution, Royal Bank of Canada (RBC). RBC has been providing financial services for
over 140 years. We are a top 10 global bank by market capitalization and have one of the highest credit ratings of any financial
institution: Moody’s Aaa and Standard & Poor’s AA-.
Client focus is at the root of how we at RBC Capital Markets build relationships and create opportunity. Our clients are operating in
unprecedented times. Therefore, we endeavour to provide them with thought leadership designed to help them navigate what appears to be a
new era in the capital markets.
One of the most noted challenges of the “new era” is raising capital. Together with the Economist Intelligence Unit, we polled more than 700
corporate borrowers and institutional investors from around the globe to gather sentiment and insight about lending and raising capital.
This white paper is the end result of the survey. It reveals some interesting insights about how lenders and borrowers view
current economic conditions and how they have affected capital markets.
We would like to thank the individuals who are quoted in this report for their valuable time and insights:
George Anson, Managing Director, HarbourVest
Curtis Arledge, Co-Head of Fixed Income, BlackRock
Gerald Ashley, formerly of Bank for International Settlements
Andrew Baranowsky, Corporate Treasury, Bombardier
Federico Bazzoni, Head of International Equity Sales, Citic Securities
Francis Beddington, Head of Research, Insparo Asset Management
Harry Borghouts, formerly Board Chairman of ABP
Pierre-Marie Boury, Capital Markets Specialist, Cleary Gottlieb Steen & Hamilton LLP
Aaron Brown, Chief Risk Officer, AQR Capital Management
Andrew Lo, Professor, MIT Sloan School of Management
Ulf Quellmann, Treasurer, Rio Tinto
Toby Segaran, Founder, Freerisk
Rekha Sharma, Global Strategist, JPMorgan Asset Management
Vern Yu, VP Investor Relations & Enterprise Risk, Enbridge
“This time it’s different” are dangerous words, warned Sir John Templeton long ago. The market’s cycle is never
different: it tips from bubble to collapse, enthusiasm to sobriety, spending to saving, the quest for return to
the avoidance of risk. Even so, more than a year after the swiftest and deepest equity market collapse in over
70 years, the question remains: is it possible that this time is different?
For many market participants, the answer appears to be “yes”. This is no ordinary turn of the business cycle.
Economists, accountants and credit rating professionals are under siege. Axioms of financial theory are being
questioned. Many in the financial sector doubt the ability of policymakers to set the economy on a path of
sustainable growth. And unlike crises that stem from cracks in investor psychology, this one is also intertwined
with fundamental structural imbalances that have yet to be addressed: massive and continuing dollar
purchases by the BRICs, Japan and Germany; multi-year periods of negative real interest rates in the U.S.; and
extreme price movements as the unsustainability of these financial flows becomes apparent.
At the institutional level, chief financial officers and chief investment officers need to make daily decisions in an
environment more uncertain than any in recent memory. Amid a massive shift in credit flows, borrowers hope
to strengthen their capital structure with long-term financing; investors, still hurting from last autumn’s market
collapse, seek the highest possible compensation for risk (if they are willing to take on new risk at all). Both sides
will have to act quickly to exploit windows of opportunity, accept higher costs or risks and possibly lower returns,
and potentially rethink the links between their financial and operational strategies.
In July and August 2009, on behalf of RBC Capital Markets, the Economist Intelligence Unit surveyed senior
executives at 736 borrowing and investment institutions from around the globe on their outlook for the future
of capital markets. Of the executives, 415 were involved in raising capital and 321 in investing capital. Just over
half of the capital-raisers came from non-financial corporations ranging in size from $75m to over $100bn in
annual revenues, with an average size of about $5bn. About 38% (281) came from commercial or investment
banks and 13% (101) were asset managers or asset owners. There were 60 hedge funds, 57 private equity
investors and a handful of central banks. Financial institutions ranged in asset size from below $50bn to over
$1tr, with an average size of about $250bn. Thirty percent were C-level executives and another 20% were at the
SVP or VP level.
The purpose of the survey was to highlight and illuminate the lessons learned by key market participants – both providers
and users of capital – in the months since the financial crisis. The survey covered a range of topics united by the theme
of sourcing and deploying capital. The table below describes the topics in the survey and highlights some of the findings.
Topic Findings
Expectations for the future • Unparalled levels of uncertainty, especially with regards to the timing and
of the global economy and durability of the economic recovery, the future direction of prices and the
financial markets, and how prospects for inflation or deflation
the rules of global capital • The expectation of muted transaction volume over the coming year
markets have changed • Re-evaluation of diversification, efficient markets, CAPM and other tenets
of finance theory
• In general, lower levels of return relative to risk
The changing roles of market • Pessimism about ability of governments, central banks or regulators
players – including central banks, to set the economy on a path of sustainable growth
intermediaries and regulators • More regulation, more competition and a persistent credibility gap
for rating agencies
How seekers of capital are • Stockpiling of capital as insurance against funding difficulties
changing financial strategies • For seekers of capital, more equity – especially private equity – and
and plans; how providers long-term debt
are changing the way they • Acceptance of higher cost of capital
evaluate investments • Among investors, stronger focus on financial strength and cash flow
and a shift to a more defensive portfolio strategy
What seekers and providers • For seekers, openness to non-traditional providers of financing, including
of capital are now looking for sovereign wealth funds, private equity funds and hedge funds
in a relationship • Focus on soundness of borrower’s or lender’s home economy and quality
of regulation as a condition for long-term relationships
Which regional capital markets • Little confidence in Russia, Japan or the U.K.
have best prospects for growth • High levels of confidence in China and India
and stability • Split on U.S. and Eurozone, with many expressing optimism and an almost
equal number pessimism
Uncertainty curtails human activity. Uncertain weather stops people from venturing outside their homes,
political uncertainty produces ineffective governments, and an uncertain diagnosis prevents a patient from
taking the first steps on the path to recovery.
So it is with economic activity. The economic crisis caused, and continues to cause, anxiety among issuers and
providers of finance alike. Companies fear that future funding needs may not be met, while providers of financing
worry about their own capital positions and are not confident that they can execute the transactions that are the
lifeblood of their businesses.
A survey conducted by the Economist Intelligence Unit in July and August 2009 reveals just 6% of respondents
expect a sharp economic rebound in the next six months. European companies across all industries are the
least optimistic, with just 4% expecting a rapid recovery, with 8% in North America. Between one-third and
one-half of respondents worldwide do not expect any uptick for a year or longer. Ten percent of respondents
anticipate at least two years of economic weakness; the figure is higher (15%) among Western European
companies and finance providers.
Capital
Asia-Pacific
raisers
North America
Western Capital
Europe providers
Investors
Borrowers
Western Europe
North America
Asia-Pacific
50% 40% 30% 20% 10% 0 10% 20% 30% 40% 50%
Disagree Agree
During the next five years, the U.S. dollar will lose
its reserve currency status
-50% 0% 50%
The U.S. and China, the world’s two most important Federico Bazzoni, head of international equity sales at
economies, are key to understanding the crisis and Citic Securities, China’s largest brokerage firm, says the
shaping a solution. It is a truism that the world’s centre of credit crisis has had only a marginal impact to date on the
economic gravity is shifting towards the emerging markets, Chinese market. He argues that the market has already
particularly China. With its undervalued exchange rate, emerged from any problems it was experiencing and the
massive exports, high savings rate and limited currency economy is expanding at a pace Western economies cannot
convertibility, China has gathered 30% of the world’s hope to match. “Western investors and companies are
foreign-currency reserves (mostly in dollars), providing the still in wait-and-see mode,” Mr Bazzoni says. “Here,
U.S. with sufficient liquidity to keep its interest rates low. everyone is talking about expansion, the property market,
Despite a 40% drop in the second-quarter trade surplus, and equities. There is lots of liquidity and the Shanghai
China will still accumulate dollars at a rate of about $155bn stock exchange is seeing record volumes.”
per year, according to Economist Intelligence Unit forecasts.
And the shift is not just to Asia, but to other geographical
As China becomes more prosperous, its focus will shift areas that can attract and distribute large amounts of
towards domestic consumption rather than exports. This liquidity. So it is conceivable that the Middle East could
will provide an incentive to float its currency, like other also become a centre of financial power, despite recent
economic powers, and allow the renminbi to strengthen. weakness in equity markets and real estate in the region.
China has already started to move in this direction: it ended Francis Beddington, head of research at Insparo Asset
its fixed exchange rate to the U.S. dollar in July 2005 and Management, which advises an Africa- and Middle East-
more recently set up renminbi swap arrangements with focused hedge fund, says, “Financial markets always follow
Brazil, Argentina and several African countries. A stronger the money. There are large pools of wealth in the Middle
renminbi will reduce the growth of exports and reserves, East, so financial markets will continue to develop there.”
and should lead to more balanced capital flows.
Many Western companies have already raised money in the
None of this escaped survey participants. They see the Middle East, including a number of banks, and this trend is
future, and it lies to the east. In particular: likely to persist, particularly if the price of oil continues to
• Asked which country is the most stable and offers recover from its lows at the beginning of 2009. Enbridge,
the best growth potential over the next two years, an energy transport company, is starting to reach out to
respondents selected China above any other country up-and-coming financial regions. Its investor base already
or region. China is seen as both a hub of growth includes the sovereign wealth funds of Singapore, Kuwait
and as the financial market of the future. and Norway, and it is conducting awareness-raising events
• Just over 40% of borrowers say that they will try to next year among investors in Hong Kong, Japan, Singapore
strengthen relationships with financial institutions and, possibly, China. Vern Yu, VP Investor Relations &
based on the “soundness of the lender’s home Enterprise Risk, says, “We are aiming to tap large pools of
economy and the degree to which it has been affected capital and we want investors to be interested in our story.”
by the financial crisis,” and 30% will consider the
“capital surplus or deficit of the institution’s home
region” when selecting a partner.
• Nearly one-third of respondents think the dollar will lose
its reserve currency status over the next five years.
6%
4%
2%
0%
-2%
-4%
1999 2001 2003 2005 2007 2009
$300
USD billions
$0
-$300
-$600
-$900
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
US$
Although parts of the corporate world are beginning to sense International Settlements, says, “Many large corporates have
a recovery, any nascent upturn has yet to feed through to the borrowed money they don’t really need in case their lines
bottom line and companies across the world are scrambling of credit are withdrawn. Corporate treasurers have changed
to secure financing. Some 60% of the issuers in the survey their attitudes towards liquidity and are gathering war-chests
say they are looking to raise capital over the next two years. of cash.”
Just 27% say they will be able to continue operations at the
same level from current cashflow, without fresh financing. One problem is that bank borrowing has become more
expensive. Market pressures forced Bombardier, one
In other words, for most companies, access to capital of the world’s four big aircraft makers, to pay higher fees
markets will be more critical than ever. Unfortunately, such for a C$600m credit facility it agreed to with a syndicate
access may not be forthcoming. Although most executives of North American banks in July 2009. Andrew Baranowsky,
surveyed expect financing activity to grow from its low levels senior director in Bombardier’s Corporate Treasury, says,
in the first half of 2009, a substantial minority expects the “Although our risk profile has improved over the last two to
pace of transactions to slow. three years, the cost to secure bank lines has increased. It
now costs us tens of millions more in bank fees.” The funding
Much of the urgency to secure financing stems from fears now sought by many companies is the kind of flexible,
that credit may become scarcer. Gerald Ashley, a banking long-term capital that provides security amidst volatility and
consultant and former central banker at the Bank for represents a shift away from a historical reliance on banks.
The Enbridge’s capital-raising best practices are particularly relevant in the post-crisis capital markets. The four principles are:
1. Plan ahead for capital 2. Actively market 3. Size offerings to satisfy 4. Set aside enough
market outages. the company. all market sectors. resources to
Never assume that Senior management Enbridge’s issuance capital-raising,
funds will be available conducts 400 separate is generally large leaving nothing
at the moment they investor meetings enough to provide to chance.
are required. Enbridge a year, the majority a reasonable “fill” for Enbridge employs
looks 18 months ahead with equity investors. loyal investors, but it a full-time team
for funding and keeps They also attend also aims to leave some dedicated to monitoring
in place several energy conferences demand on the table, markets. The team is
multi-year bank to network with so appetite remains for in daily contact with
facilities so it can investors and key subsequent issues. a syndicate of seven
pick and choose the issues such as investment banks. These
best environment to revenues, earnings, banks are retained to
issue debt in terms cashflow and gauge market demand
of accessibility and debt levels are for bonds and equities
low coupons. As a widely understood. and to collect other
result, it was able to market intelligence.
price its three recent
bond issues at levels
“compatible with
historical norms.”
Although investors will demand high risk premiums, investment-grade companies may be able
to tap the fixed-income and private equity markets. Mr Arledge says the bonds of a number of
companies represent a rare investment opportunity. “Many investment-grade corporations made
significant progress in strengthening their balance-sheet positions during the period when credit
was cheap and easily accessible, making them stronger companies and their bonds relatively
attractive,” he says.
The survey results supports Mr Arledge’s statements. Nearly half of the surveyed investors say that
they will buy investment-grade debt, the most popular asset class. This compares to just 23% that
say they will invest in high-yield debt.
And there is good reason to believe that pension funds will reconsider their portfolios. The value
of pension fund assets fell 18% in 2008, according to IFSL, and the two largest pension funds in
the U.S. lost considerably more than the worldwide average: the value of CALPERS’ assets fell
23% for the year to June 30, from $237.1bn to $180.9bn, while over the same period the assets
of the California State Teachers’ Retirement System (CalSTRS) fell 27%, from $162.2bn to
$118.8 bn. Even the most sophisticated and diversified pension funds could not fend off the
impact of the economic shock.
1 “Pension funds pare The survey shows that investors have consequently taken a cautious view of their performance
stocks, ignoring prospects. About a one-third believe that pre-crisis levels of returns will never be seen again, and
economic rebound,” there is no consensus that global equity markets will recover even two years from now. Indeed, an
Alexis Xydias and August 2009 survey of the world’s ten largest pension funds shows four cutting equity allocations
Adam Haigh, and five holding the share of equities steady (the remaining fund has no equity allocation target).1
August 17, 2009, As pension funds shift their strategies away from developed market equities, the staple of their
Bloomberg News portfolios for many decades, companies will be forced to look elsewhere.
It is this aspect that could send a shiver down the spine of CFOs.
If pension funds and the money managers they hire reduce
investments in companies headquartered in developed economies,
the pool of available finance will continue to shrink.
Bubble, crisis, contraction, recovery – everyone knows the stages of the business cycle and its
cousin, the credit cycle. If the events of the past year were part of a typical cycle, the capital-raising
lessons would be straightforward: strengthen the balance sheet, embrace greater investor scrutiny,
accept higher financing costs and stricter conditions, and be ready to act quickly when a market
window opens. These are the time-worn lessons of the conventional wisdom, and they hold as true
today as they did in 1982, 1991 and 2001.
But this time is different, and the 2008–09 crisis offers several less intuitive implications as well.
To survive and prosper, investors and issuers need to look beyond the obvious and embrace the
longer-term trends that will prevail well after this downturn has ended. For instance:
• A
s the scepticism around the applicability of portfolio theory to the real world suggests,
investors may be less willing to pay a premium for securities that offer conventional sorts of
diversification benefits. “Whatever else you might want to say about the virtues of international
diversification,” wrote Floyd Norris in The New York Times, “in this cycle it has done little to
balance the risks of investing in any one market.”2
• On the other hand, the experience of ABP holds out the prospect of investors leapfrogging
traditional fixed-income and equity in favour of more volatile and less highly-correlated asset
classes (hedge funds, private equity). As pension funds and other institutional investors adopt
more creative asset allocation strategies, new opportunities will arise for some borrowers, while
others will suffer.
• One-third of survey respondents predict growing experimentation with open-source credit
modelling – an example of how a crisis of confidence can shake loose long-standing
arrangements and drive new market-oriented approaches. As Aaron Brown of AQR Capital
Management observes, if you give credit analysts a way to prove themselves, they will figure
2 “Off the charts: Around out how to monetize their reputation on their own.
the world, stock markets • As Francis Beddington of Insparo Asset Management suggests, financial markets follow the
fell and rose, together” money, and the U.S. and U.K. may no longer be the world’s largest pools of liquidity. Moreover,
Floyd Norris, survey respondents are far more pessimistic about the future growth and stability of the U.S.
The New York Times, and U.K. financial markets than those of China, India or even Brazil. Enbridge’s decision to
September 12, 2009, reach out to sovereign wealth funds throughout the world is only the beginning. The great shift
page B1 is under way.
The details may be murky, but the broad outlines are clear. Capital-raising has become a contact
sport. Companies will have to look farther, dig deeper and work harder to lock in the long-term
capital that fuels growth. The lessons of previous downturns are still valid. Investors require
balance-sheet strength and access to liquidity; borrowers need to lower expectations and accept
higher costs. At the same time, a world in flux can be a world of opportunity. Creative approaches
to capital raising are abound. It’s up to you to go find them.
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