Wednesday March 25, 2020

Philip Watkins, Partner in our Restructuring Advisory team, explores the impact of coronavirus and how financially stressed businesses should be responding.

Following years of Brexit debate, the ongoing global outbreak of coronavirus and its impact on the UK economy represents yet another major step into the unknown for business owners. Indeed, from a business perspective, its influence is being factored into conversations in every sector and will colour financial forecasts across the economy for the next six months at least.

Of course, it’s also important to recognise the evolving picture of the COVID-19 outbreak and the measures being put in place to counteract its economic impact. The Chancellor’s Budget on Wednesday indicated unprecedented levels of fiscal support for businesses just hours after a cut in interest rates from the Bank of England, highlighting that businesses won’t be left to fend for themselves. Meanwhile, instant stock market reactions have levelled out and supply chains have remained broadly resilient to disruption as China’s factories begin to re-open.

However, any economic slowdown is of concern – particularly for those businesses already under financial stress. Flybe is perhaps the most high-profile business casualty so far, with the fall in traffic through UK airports pushing the already struggling business over the edge.

The demise of the domestic airline operator will clearly be a fate other under-stress businesses are keen to avoid. But, while very few will be the subject of intervention from central government, there are several steps they can take to get their house in order and face into the latest economic headwind.

In the know

Given we’ve seen share values fall in key markets, we can expect to see businesses beginning to issue profit warnings in the coming weeks. While well-capitalised firms will be well-placed to absorb this type of shock, stretched businesses of all sizes will be assessing their position and whether they need additional financial support to weather the storm ahead.

As such, it’s essential that business owners take stock and immediately review their current operational and financial management information with revised forecasts. This will enable contingency planning that considers changes in operations, costs, working capital, profitability and, most importantly, cash flow.

Managing stakeholders and funders

Having robust data to hand will also aid any constructive or, indeed, difficult conversations with shareholders, equity sponsors and traditional lenders. There may be a need for these parties to introduce additional cash, so open and honest discussions should be had as early as possible. It’s generally in their interest to be supportive but they will need to have confidence in the management information and the management team. Delays in securing additional financial support may also see the situation deteriorate unnecessarily.

In the event of a business having pre-existing difficulties, current stakeholders may no longer have an appetite to continue providing funding. Again, having strong management information to hand will increase the chances of an alternative lender or turnaround fund providing additional support. Many alternative lenders and turnaround funds will be willing to fund short term losses of businesses that are fundamentally sound and likely to return to positive performance on the other side of a slowdown.

In the event of a new funder being sought, it’s important to choose wisely making sure the business has as many options and as much time as possible to secure a long-term future.

In addition to engaging in that type of discussion, it is likely that dealing with higher immediate financial and operational stress could be outside of management team’s day-to-day skillset and comfort zone. As such, the addition of interim financial and operational turnaround support will buoy many as they look to navigate stormy seas in the coming months.

Coronavirus will continue to test resilience for the immediate future but, with structured planning and a short and medium-term view, it needn’t prove the end of the road for the UK’s under-stress businesses.