Navigating Volatility & Distress
The number of new infections and deaths continues to rise rapidly and, as yet, there are no signs of
COVID-19 being brought under control. While the vast majority of infections and deaths have thus far
occurred in China, concern is rising across the world that a global pandemic is upon us.
Business in China has been severely impacted. Shopping malls and restaurants are deserted, while
travel and tourism revenues in China have collapsed. The return to work after the Chinese New Year
has been slow and people are being encouraged, where possible, to work from home. Moreover, as the
outbreak and growth of COVID-19 has been centered around the key manufacturing hub of Wuhan,
global supply chains are being severely affected. Automotive plants in Japan and Korea have already
closed due to a lack of parts. You can’t assemble a car with 99% of the parts.
It is possible that COVID-19 may burn out as temperatures start to rise during spring and
into summer in the northern hemisphere, but at this point nobody knows. It is therefore
important that businesses are proactive in assessing their capability to withstand disruption
from both an operational and a financial standpoint, and that they act decisively to mitigate
actual or potential issues.
Liquidity forecasting and headroom
• Reforecast trading and cash flows. Test and challenge all assumptions. Ensure trading and cash flow
forecasts are integrated. Model a downside scenario to understand actual/potential needs.
• Review cash flow forecasts. Some businesses’ cash flows are already being devastated as revenue
evaporates. Review in detail cash flows for the next 3 months, and identify what mitigating actions can be taken
to preserve cash in the short/medium term.
• Review your lending documents. Understand the key terms, covenants, baskets of headroom and flexibility
in your banking and finance documents.
• Remain in contact with key stakeholders. Businesses should communicate regularly with key stakeholders
including their lenders and investors in order to retain their confidence and support.
In the event COVID-19 extends into medium term
• Seek out additional sources of capital early. Should cash flow forecasts suggest that liquidity will become an
issue, assess options for raising funds including asset based financing, RCF, alternative debt funds and also
equity markets and M&A.
• Keep plans and options actively under review. Sustainable financing is an iterative process.
Working capital and supply chains
• Working capital: Working capital management is
likely to be challenging:
– Businesses impacted by lower Chinese demand
may experience overstocking that could persist
until production reduces or demand picks up.
– Chinese customers are likely to delay payments
to preserve cash, while Chinese suppliers may
be desperate to be paid for shipped/ordered
– Non-impacted counterparties may offer early
payment discounts or factoring opportunities.
• Affected operations: Assess ability of own
affected operations in China to continue production
and supply. Make contingency plans for alternative
supply as required.
• Engage with critical suppliers. Assess key
trading terms and communicate regularly with
critical suppliers to understand their ability to
maintain and/or negotiate for continuity of supply.
• Alternative suppliers. Identify which of your key
suppliers may be exposed. Make contingency plans
for alternative supply as appropriate.
• Customers: Frequent engagement with customers
at an executive level is key to manage