Day by day the economic damage being wrought by COVID-19 is becoming more palpable. All businesses are implementing measures to mitigate the risks to the underlying business lines and, for some, this is the first time they are facing this challenge. The current crisis comes against a backdrop of a long period of increasing transaction volumes, valuations and fundraising (debt and equity).
Below is a blueprint of some of the existing and new tools available to both large and small UK private companies.
Understanding and managing your cash flow is even more important than usual during a financial crisis. It is important remember that cash flow issues, rather than balance sheet issues, typically trigger formal insolvency processes. Key aspects to consider (in addition to the usual issues such as understanding your receivables and payables and the impact the crisis is having on them) in relation to the current crisis are:
- VAT. The UK Government has announced a deferral of VAT payments up to the end of June 2020. Details of this and other tools available to manage your VAT cashflow are available here https://quickreads.kemplittle.com/post/102g2sf/improving-cash-flow-through-vat.
- Employee costs. One of the major costs of any business is employees. The Coronavirus Job Retention Scheme provides grants to employers who “furlough” employees. More information on this is available here https://www.kemplittle.com/blog/coronavirus-job-retention-scheme/
- Rent. The Government has announced that commercial tenants unable to pay rent because of COVID-19 will be protected from forfeiture of their leases until at least 30 June 2020. Commercial leases typically include forfeiture provisions enabling the landlord to re- enter premises where the tenant has been in arrears with rent for a certain period, where the tenant is in breach of any other tenant covenants, or where the tenant has entered into an insolvency procedure. The provisions will only delay the right to forfeiture – it won’t affect a landlord’s right to claim it after this period ends.
As well as securing finance from financial institutions in the ordinary way or renegotiating financial covenants with existing lenders to ensure availability of existing facilities (and we have already written about what we are seeing some lenders agree to here https://www.kemplittle.com/blog/together-financing-in-a-time-of-change/), Governments around the world are stepping in to ensure that businesses continue to have access to financial facilities to ride out the crisis.
In the UK, the UK Government has launched:
- The Coronavirus Business Interruption Loan Scheme for businesses with a turnover of up to £45m which can provide a facility of up to £5m. Further information on this scheme can be found at https://quickreads.kemplittle.com/post/102g2ly/coronavirus-business-interruption-loan-scheme-cbils. This is a welcome scheme as small businesses are vital to the success of the UK economy; it is estimated that they provide 50% of GDP and 60% of private-sector jobs. However, it should be noted that additional lending is by no means automatic.
- For larger firms, the Covid Corporate Financing Facility will provide a way of raising working capital. The scheme is open to firms that can prove they were in sound financial health prior to the impact of COVID-19.
In any financial crisis, existing investors and shareholders should be the first port of call for funding. We are already seeing evidence of funds slowing down or stopping new investments to ensure that they have the funds available to finance existing portfolio companies. Businesses should not, however, expect that an investment will be on the same terms as for previous funding rounds as investors (like the businesses they invest in) are finding it difficult to value equity at present (and this is against the backdrop of a significant fall in valuation of publicly traded companies). Based on the last financial crisis we would expect that some investments will be made at a lower price than on the last round (potentially triggering anti-dilution provisions), with enhanced preference rights and/or with more of the features of a debt instrument.
Obviously, it is important to understand as soon as possible what costs can be removed from a business. As well as employee and property costs and discretionary spend, contracts should be reviewed to see if they can be suspended or terminated. If notices are required, they should be served as soon as possible and in accordance with the notice provisions.
For some businesses, weathering the current crisis may not be possible (particularly when some of the protections afforded by the Government end), in which case they should be considering discussing a restructuring with the lenders/creditors. This may be informal or through a process such as a Company Voluntary Arrangement (CVA) or by way of an administration. We have seen increasing use of CVAs so it may ultimately be that there is a new wave of CVAs (particularly in certain sectors).
The Government, like Governments around the world, are looking at new tools and mechanisms to protect businesses and consumers and particular sectors of the economy. In certain sectors, particularly retail, hospitality and leisure, specific measures have already been announced.
Preparing for the end of the crisis and growth
After taking the necessary actions for stabilisation and survival, businesses need to have one eye on growth. Whilst the last financial crisis is not necessarily a guide for the current one (as each financial crisis has its own unique features), studies about the last financial crisis have shown that continued investment in key areas and/or the ability to execute quickly on opportunities that arise results in faster growth coming out of the crisis. Typically this point in the cycle is a good opportunity to undertake “corporate housekeeping” and also look at whether non-core assets should be divested at an appropriate point.