Lex Coronavirus Advice Exchange: restaurateur wrestles with bailout

Dear readers,

Welcome again to the Lex Coronavirus Advice Exchange.

This is a curated forum for Lex readers to swap views on coping with the pandemic. We welcome insights at [email protected] — further details at the end. Thanks to contributors, whose edited submissions follow.

Best wishes,

Harry Dempsey
Lex writer

Red tape is strangling UK business support

Andy Laurillard is managing director of Giggling Restaurants, a UK business with £38m turnover and almost 1,000 staff. He is struggling to get a government-backed loan because of nit-picking rules.

Our ebitda was about £5.5m before the pandemic. Our debt was £10.5m plus £2m in private equity loan notes. Our cash reserves are now equal to just three weeks’ furlough pay.

We have a weekly payroll. So we are hoping to last until the government pays the wage bill for the month at the end of April. This should be OK, as our overdraft facility is still there. But if the government misses payment for April, we probably won’t make it until the end of May (if they run a monthly cycle).

The rules changed twice mid-process for us, so it was a bit tricky administratively, but we think (hope) we ticked all the boxes and will be eligible.

However, the acceptance of furlough pay will count as state aid and make us ineligible for the CBIL [coronavirus business interruption loan] scheme, or so we have been told by the bank. We are contesting that is the rule. There is no clarity on this point.

Further, there is a new rule that’s popped up which we are also contesting — an insolvency test. If the business has cumulative losses of more than two times the share capital, it is ineligible.

Our business has had four sequential years in the Virgin Fast Track 100 list. Ebitda growth has been about 50 per cent annually for the past five years. But opening costs, refinancing costs and high initial depreciation charges mean we fail the insolvency test, despite the company being valued at about £40m a few months ago.

The share capital is £2 — my wife and I each put a pound in when we started 20 years ago.

If the previous trading trajectory had continued for two more months, we would have been OK.

Faulty thermometer guns in Singapore

A reader distrusts the gun-style thermometers used to measure temperatures outside office buildings and shopping malls in the island state.

They’re wildly inaccurate! I regularly clock temperatures below 36C, sometimes below 35C. They should call an ambulance for me for hypothermia! Ahhh, the irony of hypothermia in Singapore! It could explain why the virus continues to be spread by “asymptomatic” individuals.

This is an example of logical risk control being carried out with not fit-for-purpose equipment by people who treat it as a check-the-box exercise.

Quarantining is only for the rich in Argentina

Félix JL Mello says the ease of self-isolation there — as in many developing countries — depends on the individual’s economic status. Coronavirus has, meanwhile, brought out frustration at the long-running mismanagement of the country’s finances and economic development.

Lower middle-class citizens live in small apartments or places with no room to be properly isolated. Lower-class and indigent people making their living on the streets are left in the hands of God, even though the Fernández administration is devoting as much public money as possible to them. Quarantining is a luxury that is only properly followed by upper middle and high-class people.

The political class and highly paid public servants are quite [resistant to calls] to make huge cuts to their salaries, expenditures and luxuries. This ended in a so-called cacerolazo. This involved middle-class people getting together to make a huge noise with their cutlery and pans to protest at: a) the elite’s reluctance to show solidarity with a society that since 2015 has suffered a devaluation of more than 300 per cent in the local currency; b) high unemployment; and c) a lack of opportunities to improve their way of life.

Argentina is facing a high public debt burden that servicing seems impossible. Foreigners who remember Argentina as a European-style, stylish country, rich in natural resources, need to take a look into the current Argentine reality.

Coronavirus with annual updates

Hong Kong-based analyst Neil Newman sent us a wide-ranging essay arguing for a resurgence in value stocks. But his most striking — and alarming — forecast was that coronavirus outbreaks would be iterative, profoundly changing our society.

Epidemics will always be with us. They are just part of an evolutionary arms race between the human immune system and mutating bacteria and viruses. However, coronavirus disruption could now become an annual event with the first sneeze of winter. There have been 11 coronavirus outbreaks over the past 20 years. Several known coronaviruses that have yet to infect humans are present in animal populations. 

This year’s Covid-19 experience will lead to long-term changes in the way we live, work, interact and travel, just as the 9/11 terrorist attacks changed our perception of safety. Similarly, the impact on companies this year is not going to be just a short-term disruption of revenues, but long-term changes in the way they operate, employ, source and distribute.

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Reliance on concentrated supply chains is now too risky. Dependence on a single manufacturer for key components means the entire product is at risk in the event of a new bug. No one can any longer guarantee employing a workforce that can reliably commute to turn up and work together. The risk of doing nothing and just carrying on as before is becoming too great.

Change is likely to be costly and lengthy.

In a crash, all stocks go down and valuations are reset. Markets tend to overreact to bad news. But where there’s a crisis, there’s an opportunity. What happens next is key. History suggests that a market shock of this magnitude will justify the patience that value investors have shown.

Boardroom adaptation for the future

Neal Kissel and his business partner offer their tips on the lasting changes after coronavirus that executives should begin planning for now. Lex found their thoughts on environmental, social and governance (ESG) particularly interesting.

  • Increased working from home

  • Tipping point reached for online and direct transacting

  • The rise of “cocooning” as a persistent consumer behaviour

  • The (partial) reversal of supply chain globalisation

  • The redefinition and reassertion of “ESG”. Expect as much focus on “S” and “G” as on “E”. The virus has brought into focus just how long-term, notionally “abstract” risks can threaten the very existence of businesses in a very short timeframe, once they materialise. Investors concerned about risk management will have this in mind in the future. Societal reputation and behaviour during this crisis are being judged and rewarded not just by the public but also, increasingly, by the investment markets. Witness J&J’s bump in share price once it announced it was working on a not-for-profit Covid-19 vaccine. Public discourse was already heading in this direction pre-Covid 19, but the virus accelerates and extends this.

Covid-19 statements: silence not golden

Jerry Upshall thinks vague Covid-19 statements from companies — or their complete absence — are a danger sign. Lex is in strong agreement: the quiet ones are the ones to watch out for.

As I sit here looking out my London window on a sunny day of seclusion, I see only fog.

We have had swift medicine from governments trying to underpin the economy and are inundated with data on the health and macroeconomic impact of the virus.

Companies have issued statements of varying usefulness. The useful ones don’t try to predict the future. They give insights on the company’s ability to survive, about liquidity and ability to flex the cost base if revenue falls off a cliff for any length of time. The less useful ones range from revising guidance to “we should be fine”.

Mostly, though, I hear deafening silence. Look down the list of quoted companies that run factories, warehouses, shops and offices. Are they still operating? Almost any company I look at would suffer huge declines in profitability if their revenue goes to zero for a prolonged period, not to mention their solvency. How can any listed company remain silent when this is going on unless out of fear that their share price will suffer even more once they lift the veil?

We will be in for a rough ride in the stock market once the silent majority of companies finally begin to disclose details of the impact this crisis is likely to have (or has had) on their business.

Don’t force pharma companies to work for free

In response to Lex’s suggestion that pharmaceutical companies should make a coronavirus vaccine freely available, once developed, Hanno Lustig, professor of finance at Stanford Graduate School of Business, believes a more competitive spirit is needed.

Surely, we all agree that the key to putting people first is to have an effective vaccine available as soon as possible. Is there any reason to believe that these companies will commit more resources to vaccine development once we have made sure that they will lose money on its development?

I would think not. I wrote a piece with three colleagues arguing the exact opposite, namely that governments should commit to a large payout to whoever develops the vaccine first.

A simple back-of-the-envelope calculation suggests that we have been massively underinvesting in vaccine development. You are proposing that we collectively invest even less going forward.

Video conferencing

Lex online meetings are running more efficiently and we consistently wrap up within 30 minutes. Richard J Crespin, chief executive of consultancy CollaborateUp, sent over advice to help communicate in virtual meetings.

For leaders:

  • Plan differently and deliberately

  • Encourage use of a chatroom on the side

  • Designate a techie to solve problems

  • Fully participate

For participants:

  • Bring your patience and good humour

  • Know your equipment

  • Leave time for testing and updating

  • Take these meetings seriously

Lockdown exit strategy

Hugh Aldous suggests mass frequent testing for coronavirus in the UK, driven by human resource departments of employers, followed by a rota to test freelancers and the unemployed in polling stations. He proposes setting up a traffic light system for people to return to economic activity in society with testing to be undertaken by thousands of airline staff and volunteers, despite possible objections from Public Health England.

Another Lex reader highlighted the positive role he thinks private equity companies have to play in the economic recovery by using their huge cash resources to purchase and resurrect distressed businesses.

Contributing to the Lex Coronavirus Advice Exchange: core subjects include running organisations, finance, investment and staying professional in tricky circumstances. The kinds of things you would expect Lex readers to know about, in other words.

We are very grateful for contributions sent to: [email protected]

Please use the subject header: “Advice Exchange”. Then we won’t get your email mixed up with responses to individual Lex notes. We will select the contributions we think most interesting and edit them as required. This will sometimes mean heavy cutting. Please feel free to use a nickname or “Lex reader” as your sign-off. Only sign off with your real name if you want us to use it in print.

Many thanks,

Jonathan Guthrie, Head of Lex

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