Enforced lockdowns are wreaking havoc on near term cash flow. But it’s one thing to say, ‘be sure about where the funding is coming from’, and another thing altogether to know where to start. Especially when fast decisions may make the difference to coming out on top.
The ultimate scale and ambit of the COVID-19 pandemic is more difficult to predict than was the case with the Global Financial Crisis. That’s not to say companies can’t draw on that experience, not just from who survived, but how.
“We will continue to see wild swings in the equity markets over the next few months as the market digests the 24/7 media and other feeds on this crisis,” EY Partner Duncan Hogg says. “As with the GFC the more prolonged the crisis, the more equity will be raised”
Hogg, who specialises in M&A and has spent more than two decade in investment banking, says the impact on the markets of COVID-19 has been different to the GFC, because government enforced lockdowns are putting immediate pressure on near term cash flow.
“Although it didn’t feel like it at the time, the GFC was more of a slow burn from an equity markets perspective [because] the focus was more on debt maturities and refinancing events of companies."
Jason Lowe, who helped establish EY’s Capital and Debt Advisory team says another key difference is that the debt markets have changed since the GFC, with diversification of lending sources and the emergence of a significant non-bank lending market, including hedge funds.
“We estimate that this market is approximately $100bn and growing. One major hedge fund is advising that they are ready to go, with approximately $5bn in capital to deploy globally,” Lowe says. “These types of lenders can provide senior loans through to rescue debt and equity hybrid funding packages”.
They say there are still lessons to learn from the GFC:
- Act fast. If you don’t already, ensure that certainty of funding is at the forefront of capital management strategies.
- Money is available. Australian super funds are still sitting on large pools of capital that needs a home. $100bn was raised from equity markets during the GFC, showing shareholders will support companies they believe have strong fundamentals.
- Don’t get caught behind if you want to draw down liquidity lines. Companies didn’t focus on rapid moves to do this in the GFC, but should now.
- Listed and private companies each have equity options available. The key is assessing the options based on a balance of timing, and fairness to all shareholders. PE firms are also sitting on significant dry powder, some will wait for the volatility to stabilise slightly, others are already offering equity injections, convertible notes or alternative debt structures.
- If you wait too long, you risk having to discount to get the deal away, and you could face subdued investor appetite if a number of companies pull the trigger around the same time
In mid-March, the Volatility Index peaked at around 82, its highest levels since the GFC. EY Partner Sebastian Paphitis says they expect to see the minor pricing and terms adjustments increase in the coming weeks as banks reassess their risk appetite.
“In late 2007 we saw all the banks look to reprice and ration credit, and in the past weeks we have started to see the same with terms sheets on live deals being withdrawn and repriced," Paphitis says. "We know of one bank that will only keep pricing on a terms sheet open for three days.” Banks are also being inundated with enquiries about covenant waivers, liquidity requests, payment holidays, he says.
For now, Hogg says what he’s seeing with is share buy backs and dividends being turned off, and companies retracting or withholding guidance for the year before looking to the equity markets to fund near term working capital requirements.
“Most clients have put any asset sales on ice and are internally focused on their cash flow. As time progresses, we may see some asset sales as an alternative source of raising capital”.