I’ve been trying to put together an update of banking & finance as I see it for the last week, but the world is moving at such an incredible pace wherein 2 day old news is obsolete. As a perfect example, Westpac’s chief economist was just late last week forecasting unemployment of 7%, but just today that has been revised up to a staggering 11%.
That in itself is a scary number and certainly something Australia hasn’t experienced for a long time. December 1992 to be accurate, when it peaked at 11.22%. Now I was in my last year of primary school that year, so I couldn’t personally tell you what it was like to live through that with a job and a mortgage, but I’ve heard enough stories (and you older folk, please do add your comments below about your experiences).
Only 2 weeks ago, most of us were saying “what’s everyone worried about, and what’s with all the idiots buying all the toilet paper?”. What started with a temporary supply-chain shock from China has evolved at break-neck speed to become the fastest global stock-market crash on record with countries shutting down their borders and economies grinding to a near total halt. Although not hitting the headlines as much, credit markets are seizing up, there is a global flight of capital out of just about every asset into USD paper; the AUD/USD plummeted last week, touching 55c before bouncing (in what could very easily be a dead-cat bounce).
What we’re seeing with Banks & the Debt Market
To start with, a few quick high-level notes as to what we’re seeing, based upon the countless calls we’ve had with bankers & fund managers over the last week (note that this is dated 24th March, so if you’re reading this 1 week later, all of this may well be completely irrelevant… but I hope not!!)
- Priority #1 for them is understandably looking after their existing clients;
- They’re mostly still scrambling to work out exactly how they’ll be implementing the Government-announced measures to support businesses;
- For businesses with turnover less than $50m and/or debt facilities less than $3m, call up the bank and tell them you’re facing challenges and need deferral of repayments, it should basically be a case of “if you ask, the answer is yes”. Temporary overdraft increases should be relatively easily forthcoming, so just ask.
- For larger businesses, expect to be asked for a reasonable amount of information to show (1) what actions have been (or are being) taken to cut costs (don’t just expect the bank/govt to cover your losses) and, (2) financial forecasting to show likely & worst cases.
We expect requirements to vary from bank to bank – and even the bankers themselves are mostly not yet entirely sure of what credit will expect of them (hopefully that’s changed by the time you read this!).
CREDIT FUNDS & private lenders:
- Some have hit the panic-button, withdrawing terms sheets and taking a “wait & see” approach to the economy before writing any more cheques.
- Others are very much open for business though, and keen to write business whilst others are running scared.
- The old “supply/demand” principle is already rearing its head though – the last 12 months has seen downward pricing pressure as there has been a lot of money coming into private credit – now we’re seeing talk of rapid pricing increases.
Quick & Dirty Recommendations
If your business (or your client’s) is going to be under pressure during the COVID-19 crisis period (which is highly-likely to involve a complete lock-down, other than for essential services), a few quick points as to our recommendations:
- Work out realistic potential impacts ASAP (with “moderately bad” and “terrible” cases, forget about “best case” because there’s not much chance of that unless you own a grocery store, in which case you’re probably not bothering to read this, nor would you have time in between re-stocking the toilet paper and canned tomatoes!), which for most businesses will probably include 30 to 60 days with ZERO revenue.
- Strategy to contain Operational Expenses. You should definitely be negotiating with your landlord as a first port of call (who in turn should be seeking deferred repayments from their bank); most businesses are of course also seriously looking at their payroll (hence the high forecast unemployment rate). Look at every line of your P&L and cash flow.
- Ask your Bank to defer loan repayments and any increased funding that you may need to weather the storm.
- Review Government incentives/subsidies to work out what you can take advantage of… Check out the Federal Government‘s page… For State Governments, Smart Company’s summary is excellent.
Get professional advice immediately to assist in building financial forecasts if you can’t do reliable ones yourself!
Talk to your Trusted Advisor first (Accountant or Debt Advisor) if you have any concern about broaching this sensitive subject directly with your Bank.
But is More Debt the Solution?
The hard pill to swallow in a recession is that many businesses simply won’t survive.
If a business was only just holding on up until a couple of weeks ago, when everyone was spending money like there’s no tomorrow – and considering the fact that once the COVID-19 crisis has passed, the economy will not likely rebound instantly – a previously struggling business then trying to carry extra debt will likely struggle even more.
Getting advice from an Accountant and/or Insolvency Practitioner is critical ASAP for businesses in this situation (we’re happy to point you in the direction of a good one… and FYI, a good insolvency practitioner is not interested in just putting you in the grave – the good ones can actually provide you with very good protection and/or help save you).
Assuming you can Push Through to the Other Side…
- Timeframes will blow-out… and will be frustrating, particularly when you’re under significant pressure and want to know which way you’re headed yesterday. Bankers are getting smashed beyond capacity (and it will only get worse) and their back-office support teams have vanished as India & Philippines are on lock-down. So it will probably take a bit of time to actually get things done.
- Covenants? Chill… Every business is likely to breach covenants (except for the grocery stores & front-line health!) for the March and June quarters. I think it should be fair to assume that every bank will waive covenants for these quarters (provided that you’ve done as much as is reasonably possible), so don’t stress about covenant breaches that can’t be avoided.
CONCENTRATE ON HAVING ENOUGH CASH TO SURVIVE.
CAN YOU BORROW MONEY NORMALLY IN THIS CRISIS?
Credit markets globally HAVE seized up already. Not completely, but it’s not good.
Corporate bonds in the US for junk-rated companies (and that doesn’t mean rubbish companies about to die, that just means those that aren’t rated Investment-grade by a ratings agency) shot up about 900bp (yes, 9%) late last week… That’s insane and very much GFC-repeat.
This is precisely the reason that the RBA has committed to lending $90b (and promised more as needed) at 0.25% to the banks and the US Fed has just committed to UNLIMITED capital support. That’s insane – and that unprecedented level of support proves just how concerned governments & central banks are about the financial system collapsing (seriously).
On the local front – can you still borrow money here?
BUSINESS / CORPORATE borrowers
- YES, BUT…
- We’re halfway through a number of deals wherein banks have promised us that they are very much still open for business…
- ON THE PROVISO THAT a detailed risk assessment is presented to the bank to show how the business will get through the COVID19 crisis, including the likelihood of a complete lock-down, as well as how they are expected to perform on the other side in what is expected to be a recession that may drag on a while.
- YES, BUT…
- Risk appetite has certainly dropped off for highly-leveraged deals, so there will certainly be a focus on lower-risk deals with solid operators.
- There are lenders out there that have pulled out, others who are very much still in.
- So now more than ever is the time to lock in funding ASAP.
- YES, BUT…
- There is certainly a massively increased focus on who the tenants are.
- If you have a grocery store tenant (that can’t sell enough toilet paper!) or front-line medical/health, great.
- Discretionary retail or hospitality? Probably forget about it unless you’re in a very strong position.
“CASH IS KING”
For the last couple of years, there has been a lot of money flowing around in the system looking for a home – which has driven down yields on all forms of investments – including debt (cheap & easy money!). Whilst the term “cash is king” should apply at any point in time, it isn’t of too much concern when you can be confident that you’ll be able to get more if and when you need it.
But in a downturn – and particularly a crisis as we’re in the initial stages of – liquidity is more valuable than price.
If you’re looking for funding, absolutely you want to get the best possible price. But if option A is $1 at 3% and option B is $1.50 at 4%, you should seriously consider option B. That 50c may end up being worth far more than the extra cost – whether that’s to keep you alive, or to take advantage of opportunities such as getting the bargain of a lifetime by being able to offer cash terms and a quick settlement (whether on a property or a business).
Add your thoughts in the comments below, or feel free to drop any of us at STAC Capital a line if you want to discuss how anything in this post affects your situation.
All my best wishes and hopes go out to everyone in the community that is facing this very challenging time.
– Mark Trayner