By Special to The Nation
Usanee Lekvanichkul, Partner, Financial Advisory
Pornpun Wesaratchawet, Director, Financial Advisory
The rapid spread of Covid-19 has had a significant impact on businesses and markets globally. The Southeast Asian capital market has been experiencing a major decline across all geographies and sectors and unsurprisingly the hospitality, mining, shipping, construction, and oil and gas industries have experienced the largest drop in market capitalisation.
Many countries in Asia Pacific, EMEA (Europe, the Middle East and Africa) as well as the Americas have been implementing extensive measures to turn a downside scenario (assuming the Covid-19 infection rate continues and worsens its impact through 2020 and 2021) to a recovery scenario (assuming Covid-19 infection rates drop by mid-year and markets recover).
To bring down the number of infected cases, many governments have implemented stricter measures for social distancing with “shelter in place orders and partial or complete lockdowns. These have had wide and deep financial impacts on businesses and markets, with transport, hospitality and manufacturing sectors seeing significant disruption. Notwithstanding, short and medium-term opportunities can also be seen in some sectors such as healthcare and life science.
In the face of such challenges and risks, businesses need to respond, refresh and accelerate contingency plans to ensure they survive the downturn and are well-positioned for growth when recovery arrives. However, some businesses have not yet understood how much they will be affected and what would be the most appropriate actions to be taken to cope with the Covid-19 outbreak. The most essential factors in this constantly evolving situation are speed and effectiveness of response to the financial impact.
Here are some moves management teams can make to mitigate the financial impact of Covid-19:
• The finance and operations teams should work together on re-forecasting and assessing financial impact under three scenarios: short-term market recovery and longer-term downside.
• Closely monitor short-term liquidity requirements, improve visibility on potential funding gaps and potential internal sources of cash (eg unused and revolving credit facilities, excess working capital etc).
• Engage early with lenders on the requirements for resetting of debt contracts, waivers to prevent surprises and seek additional sources of capital (if required).
Supply Chain Risk Mitigation
• The Covid-19 outbreak has had a massive impact on global trade, particularly from China – the world largest supplier.
• Businesses need to improve their visibility over critical suppliers and beyond tier-1 suppliers. This will increase supply chain transparency across multiple tiers of the extended supply chain to identify risk and develop mitigation actions.
• Start active monitoring by setting reporting KPIs to ascertain suppliers’ ability to meet their manufacturing and demand requirements.
• Prepare for upstream production (plant closure) and logistics disruptions to understand and activate alternate sources of supply.
Working Capital Optimisation
• Businesses should seek to optimise and monitor working capital to identify and unlock cash release opportunities.
• Examine operational, strategic and financing levers for AR, AP and inventory that can help improve liquidity, eg shorter payment terms for discounts and debtor financing, reducing safety stock levels and consignment strategy, negotiating terms and supply chain financing, eliminating early payments and prioritising critical suppliers.
Cost Base Realignment
• Cost bases need to be re-evaluated and re-aligned in line with challenging business conditions amid the Covid-19 outbreak.
• Assess opportunities to improve resource and fund allocation, process efficiency and systems enablement.
Credit and Funding
• Using reforecasting tools to define the gap and assess if additional funding is required.
• Identify un-pledged collateral and structuring opportunities and engage lenders early.
• Demonstrate how the business is doing its part (eg working capital optimisation and cost-saving measures) and seek committed but undrawn lines of credit as a liquidity buffer.
Under-performing Business Units
• Rapidly assess and develop a clear strategy around the alternative options to either fix, sell or close of non-core, underperforming or loss making business units, divisions or subsidiaries.
• Effective planning (operational, financial, risk, stakeholder etc) is essential to successful implementation.
Distressed M&A Opportunities
• This crisis can become an opportunity for businesses and investors who position themselves early in order to seize the opportunity.
• Ensure your house is in order and re-calibrate your strategic priorities on a path for viable inorganic (M&A) growth.
• Scan for under-pressure targets with potential synergies.
• Assess funding requirements and sources available.
As top management and business leaders, the earlier you can anticipate and prepare for future scenarios, the better position your business will be in handling the impact of crises. After all, history has proved that there’s always an opportunity in any crisis.