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Mar 15, 2020

This will pass, but some firms will fall

written by Lisa Eason

The past month has been very testing for many businesses. Trading has been disrupted, employees and customers are fearful of falling ill and entrepreneurs are worrying about meeting the payroll.

Some financiers are definitely preparing for the worst. A big private equity firm — for the present, nameless — has instructed all its investee companies simply not to pay suppliers and landlords this month. From a purely selfish perspective, this might make sense, but beggar-my-neighbour policies amplify the challenges faced by others.

I suspect that if there is widespread financial difficulty, the government will encourage HM Revenue & Customs to extend forbearance to struggling businesses — permitting another “time to pay” system like that introduced after the financial crisis. In this way, PAYE, VAT, national insurance and other tax payments can be deferred.

Rather as with human victims of the virus, those companies most at risk will be the ones with a pre-existing condition. Firms with high gearing or heavy cash losses will be the first to fall. No doubt the banks will be selective in deciding which clients to support.

Many companies are already moving to draw down all their facilities in case credit lines are withdrawn. Costs are being slashed. Unfortunately, failures will lead to bad debts — we’ve already seen one business that owes us money go bust. I’m sure the insolvency practitioners are licking their lips at the disasters coming down the pipe.

Certain industries are much more exposed than others. On the front line are airlines, shipping, hotels, exhibitions and conferences, cinemas, theatres, casinos, cruise lines, oil and gas, tour operators and travel agents. While veterans of these trades are used to volatile conditions, the coronavirus — and the panic it has provoked — seems a more serious threat. For entrepreneurs used to controlling their own destinies, these are stressful times.

What can an owner do to maintain revenues, other than encourage everyone to wash their hands? Shutting up shop isn’t an option for sectors such as leisure, hospitality or entertainment — that way lies rapid bankruptcy. Other organisations rely on China for parts or finished goods and cannot obtain supply. Professional services firms, software companies and the like can ask staff to work remotely, but for most companies I’m involved with — restaurants, retailers, manufacturers — home working is impossible.

Longer term, there are fears that the coronavirus will reverse globalisation and spread protectionism. I suspect consumers do not want that: they like the products and services supplied cheaply by international trade. But trust is in short supply currently — we fear infection from other passengers on public transport, and offices even have prominent signs up saying visitors should not shake hands.

Restoring confidence in normal human relations will take a little time, although at heart we are social animals who crave person-to-person contact.

Rate cuts mean that bank profits will be further weakened — which partly explains why their share prices are so weak. Banks will also suffer rising levels of loan defaults. No doubt the government will lean on them to provide waivers for covenant breaches by sound companies that have experienced problems that we all hope are temporary. This approach will require co-ordination from the authorities — ministers as well as regulators — to build flexibility into the financial regime during these exceptional times.

I hope the government’s extra funding for small businesses, announced in the budget, helps. It was a shame that in the same budget, the chancellor basically destroyed entrepreneurs’ relief. He is clearly receiving bad advice.

I imagine all merger and acquisitions activity is on hold right now. Buyers will want a degree of certainty before they proceed, while sellers will worry that the current conditions may inspire low-ball bids. This paralysis will hurt investment bankers, who were hoping that deals and floats would rebound after the Tory election victory. Sadly for them, any resurgence has been deferred, probably for many months.

Central banks cutting rates might boost liquidity in the markets, but it has also crashed yields on bonds, meaning pension fund deficits will soar. Expect more conflict about who pays the bill for the increased liabilities.

Those who have battled through big downturns before know that business is cyclical, and that this too will pass. In the coming months, leaders will need extra resilience and energy to succeed. Once the storm is over, entrepreneurs and companies will be stronger and better equipped to manage the next threat.