Full extent of Covid-19 damage will emerge after relief measures expire

Thu, May 07, 2020

Lee Meixian


THE Covid-19 (Temporary Measures) Act will help to support some companies here that would otherwise not survive the extended impact of the virus fallout.

David Chew, partner at restructuring firm DHC Capital, says that the Act helps companies with liquidity problems to buy time to get through the crisis.

"This will just delay the day of reckoning. We refer to it in the market as 'kicking the can down the road'. These companies likely will need to be restructured and the level of support will likely not be enough."

Perhaps, like what Warren Buffett said, "Only when the tide goes out do you discover who has been swimming naked"; similarly when the relief has run its course, companies that are unsalvageable will be left on the shores.

At that time, the options available to them would include restructuring, rescue, and in the worst-case scenario, liquidation.

As it is, companies that were doing fine before Covid-19 but are now hit hard will still feel the impact later if business sentiment does not pick up once the support measures run out, Mr Chew says.

This is because the measures include rebates and access to new loans. The rebates help to cover operating losses, but probably not in full. At the same time, new loans will need to be funded from retained profits or new capital injections.

Mr Chew notes that the support measures do not write off debt amounts, but merely defer the repayment of bank loans. They will still need to be paid later and if business sentiment does not pick up by then, this has the potential to permanently impact earnings and cash flow.

"This can lead to loan impairments as debt becomes unsustainable, and can lead to the need to quickly reduce operating costs to cut the cash burn," he says. Likely, employees will need to be laid off, and further government support may be needed.

Restructuring specialists generally agree that the true extent of the damage will only be visible come October this year when the six-month period to satisfy or set aside a statutory demand ends.

That is when the market will see wind-ups, either initiated by creditors or by companies themselves if they decide to close shop to preserve value even if they can pay off their creditors, simply because they cannot continue their businesses in a viable manner anymore.

Lenders will play a significant role in deciding who survives, as they evaluate proposals to determine and decide if a company should be sold or restructured.

Being sold on a distressed basis to bigger competitors will be one possible solution for struggling companies, while others may be restructured and rescued. The decision depends on the relevance of the target company to investors' businesses, as well as the target company's financial position, competitive advantage, brand, products and quality of management team, among other factors.

Mr Chew says the economic and social landscape has permanently shifted. Companies in certain industries will rebound more quickly than others, while companies in other industries may face permanent change and never be the same again. In those industries, some companies may not be worth restructuring and the best course of action may be simply to liquidate them.

Another restructuring specialist who did not want to be named notes that insolvencies never happen so soon after a crisis strikes, because companies will continue to struggle for a period of time before they throw in the towel. "It's a slow upward, inverted-L curve," he says.

In essence, the loan deferment for small and medium sized enterprises until the end of the year merely provides temporary respite and delays the inevitable for some companies, which will need restructuring help or face winding-up action when the time is up, he says.

The sad reality is that many other small mom-and-pop businesses may also close quietly without anyone taking notice.