Australian corporates have seemingly never had it so good. Revenues are up - interest rates are low. Business confidence is up - company taxes ‘may’ be lowered. Much needed demand growth in non-mining sectors continues to gather pace, the Australian dollar is forecast to fall to US$0.68 by June according to East & Partners research and commodity prices are trending higher, supporting the country’s trade balance favourably.

Why then is such a palpable level of positive sentiment among Australia’s largest enterprises belied by a sense of concern? Are conditions not as resilient as they appear?

Aside from major macro headwinds such as stagnant wage growth, household debt approaching A$2.5 trillion, trade protectionism and geopolitical threats, what is holding corporates back from scaling up well overdue capital expenditure?

To better understand forward dated borrowing intentions among Australian corporates, East & Partners (E&P) partnered with S&P Global Markets Intelligence (S&P Global) to develop the Business Credit Demand Forecast report. The powerful analysis presents current debt aggregates mapped against predicted borrowing demand for the upcoming year based on 806 direct interviews with CFOs and corporate treasurers of public and private enterprises. Corporates included in the representative national research sample had annual turnovers above A$100 million.

E&P demand-side, forecast analytics were overlaid on S&P Global’s underlying aggregate debt data for listed and private Australian enterprises for the first time, providing a weighted measure of forward business credit demand. The inaugural analytics are designed for application to both internal client bank credit reporting purposes and corporates undertaking sector based benchmarking.

Corporates reported current and forecast changes in both short and long term debt mix, discontinued debt facilities, cost of debt, debt-to-equity ratio changes, reasons for borrowing and barriers to investment. What was clear from the first round of research is that significant variance in credit appetite and debt mix exists by sector, segment and debt facility.

CFOs are highly sensitive to changes in gearing levels and seek to implement transparent balance sheet management. New capital expenditure is a major focus area for banks and corporates alike as many sectors hold back on launching new debt funded projects, citing concerns over their current debt load or servicing the loan over an extended period if the cost of debt rises.

When corporates were asked if they expect their cost of debt to increase, and by how much, all 806 respondents expected interest rates on loans to rise from record lows on average by 0.92 percent, headlined by Consumer Discretionary and Real Estate sectors. Despite the low interest rate environment, many large scale projects are being funded out of cash flow without any equity raising taking place or with a small component of corporate debt.

Telecommunications, Real Estate and Materials sectors represent the bulk of new credit demand. Less than two thirds of enterprises in these sectors are currently sourcing enough credit for both operational and capital expenditure needs. Conversely firms based in the Energy, Healthcare and IT sectors report a high level of debt utilisation. Less than one in five corporates in these sectors are not sourcing enough credit to meet new investment requirements.

The primary reason for increased borrowings is the low cost of debt capital currently available, nominated by 58 percent of corporates, followed by project specific needs (36 percent) and general balance sheet management (34 percent). The proportion of firms seeking new debt funding for planned merger or acquisition activity is relatively low at 21 percent, as is internal capital expenditure needs (20 percent). Of the 14 percent of corporates decreasing borrowings, almost one in two cite adequate working capital needs already in place (44 percent), followed by improved capital management (40 percent), a response to reduced customer volumes (23%) and sales of operating entities (19 percent).

S&P Global Fixed Income research revealed in a recent report titled "Asia-Pacific Refinancing Study - A Peak Of $253 Billion In Rated Corporate Debt Is Set To Mature In 2020" that between 2018 and 2022, US$1.1 trillion of rated Asia-Pacific financial and non-financial corporate debt should mature, representing close to 11 percent of total global debt maturing. Almost two thirds of total regional debt is attributed to corporates in Australia, New Zealand and Japan and scheduled to rise to a peak of US$253 billion in 2020, from US$206 billion in 2018. About one fifth is from Chinese companies.

As part of the Business Credit Demand Forecast analysis, Australian corporates indicated that up to A$980 billion in debt facilities was unused or discontinued in 2017, comprised predominantly from Other Borrowings (76 percent), Term Bank Loans (12 percent) and Senior Bonds & Notes (8 percent). Interestingly the majority of discontinued credit facilities was Long Term debt (91 percent) as opposed to discontinued Short Term debt lines (9 percent).

Forecast corporate debt is set to increase to A$1.85 trillion in 2018, with short and long term debt comprising 31 percent and 69 percent of current debt facilities respectively. By sector, Industrials and Utilities carry the highest debt-to-equity ratios of 1.44 and 1.51 respectively, in contrast to high levels of equity funding characterising the Materials sector with a ratio of 0.42.

Upcoming rounds of research will provide valuable proof points for the ability of CFOs to accurately forecast changes in credit demand and reactiveness to changing underlying credit conditions. Balancing business and technology investment ‘animal spirits’ against long term sustainable capital management remains an ever-present challenge for CFOs and corporate treasurers however improved granularity in credit reporting, forecast borrowing demand and reasons behind decision making is integral for both banks and corporates to successfully navigate the year ahead.