Mar 29, 2020

Trust will be tested to destruction

written by Lisa Eason

Our way of life is more fragile than we thought. So much we used to take for granted is no longer possible. Perhaps most of us were too complacent. Now every sinew is being stretched in a battle to stay healthy and afloat.

Whole industries are on life support, stakeholders praying that companies make it out the other side in solvent condition. Few directors even have the time or energy to worry about whether they are breaching the Companies Act by continuing to trade — knowing their business can’t meet its liabilities as they fall due. Instead, they are struggling on many fronts — deferring liabilities, cutting costs, trying to keep up the morale of their people.

At Gail’s we have a war cabinet fighting to keep our bakeries open. We operate takeaway food shops and are entitled to trade, but we need staff to run them, and supplies to keep flowing, for the show to stay on the road.

So our customers patiently queue outside, the recommended distance apart, and we serve them roughly one at a time — and the public seem grateful that we are still providing our local communities with fresh bread and other baked goods.

It’s wrong for the country to depend exclusively on supermarkets for all our food and drink — as it is, the giant multiples have an overwhelming share of the retail grocery market. Corner shops and convenience stores are a respite from the supermarkets’ dominance — and some neighbourhoods would have no local offering accessible for those without transport.

There are uplifting moments amid the gloom. Every evening, I and various members of our teams deliver delicious free food to heroic staff in A&E departments in London’s big hospitals. Courageous medical teams are very appreciative of our modest efforts, and we feel we are helping the great cause, at least in a small way.

Many firms I know are in a degree of hibernation. While some employees can work from home, many cannot — and a majority are not doing “essential” work. Manufacturing, construction, business services, transport, oil and gas — lots of sectors are almost shut down, not just the obvious casualties such as hospitality and travel.

Once the shock of this crisis starts to wear off, the nation will begin to grapple with cabin fever, boredom and declining mental health from being cooped up so much. I fear an avalanche of litigation will follow in the wake of the virus — contracts broken, debts unpaid, everyone looking to blame and claim from someone else.

In a sophisticated economy, commercial relationships depend on a high degree of trust and properly functioning rule of law. This will all be tested to destruction in the weeks and months ahead. Normal rules in many respects are currently suspended — but when some degree of order resumes, there may be a great deal more suspicion and caution about extending credit or assuming risk than used to be the case.

This crisis is revealing the good and bad managers. Some are proving their abilities by reacting swiftly and intelligently to these shocks. Others are demonstrating their weakness. Quite a few bosses will be replaced — those who cannot deal with pressure, or who failed to take the matter seriously enough, or who did no planning and are exposed as incompetent.

Companies and entrepreneurs are scrabbling for cash in every corner. All bank facilities have been drawn down. Few owners I know want to borrow via the various emergency government loan schemes — personal guarantees are required, and no one knows how any debt is to be repaid once this agony is over. Some are making emergency cash calls to their shareholders — both public and private companies. Investors are facing a hard choice: who really understands what anything is worth right now, and when revenues and profits will start flowing again? Should backers hoard their cash, waiting for even cheaper deals, or is now the time to strike a bargain?

Finance teams are desperately drafting and redrafting endless different projections of cashflows for the coming months. Each new initiative from the government — the business rates holiday, the staff furlough package, the lease forfeiture moratorium — means a new set of numbers, trying to show when the company runs out of money.

Yesterday, firms were petrified of breaching bank covenants. Right now, even FTSE 100 companies do that: it’s just about keeping going and hoping we reach the sunlit uplands before too long.