There is only one certain long-term effect of the Covid-19 pandemic – everything else remains some degree of speculation at this early stage. The certainty is that we have already crossed the Rubicon of change and that we cannot exist in the way that we did before – very little in our business lives will remain untouched by the effects of this pandemic.
We do not know how many of our employees will die or become gravely ill in any given region, nor what the impact will be on our suppliers and customers. We do not know when full or even partial economic activity will resume or, when it does, what level of business activity will be possible. There are of course regions of the world who have gone through the curve of the pandemic earlier than others and their hesitant steps toward a more normal resumption of trade are instructive. Yet we do not know whether re-infection of those populations will occur. We do not know whether an effective vaccination will be developed and, even if so, how long it will take to rollout to the global population and at what cost. In short, we simply do not know what the economic and human cost (both physical and emotional) of the Covid-19 pandemic will ultimately be. As I have said, however, all we do know is that we are unlikely to live and work in the way that we did before the pandemic.
There have been many papers written and presentations given about the sweeping changes that the full advent of 4IR will bring to the way we live and work, but the Covid-19 pandemic has kicked all of that thinking into touch, really. It is now more about survival in an already-changed world, as if a cosmic switch had been flicked and we are suddenly transported into a future state, to varying degrees of unpreparedness.
Enforced change is simply upon us already – there is no phase-in period. Even if we could magically resume full economic activity – we can’t in my own country (South Africa) as our Government has instituted a very strict lockdown, but let’s just imagine that we could, for the moment – the creeping effects of subtle change in our business environment is more likely to squeeze margin than the reverse. An urgent need to shore up leaking balance sheets is very likely. Many businesses would recently have felt comfortable with a given level of leverage, for example, and perhaps justifiably so. In an abruptly changed business environment, however, will a board of directors feel as comfortable about the solvency and liquidity outlook of the business? Remember, any business is dependent on a group of directors, each of whom bears enormous personal liability for decisions made by the board of directors. Faced with the prospects of personal liability, a director is likely to behave cautiously when considering whether a business has the means to discharge its liabilities during the year that lies ahead.
The cost of servicing funding liabilities is thus likely to be brought into sharp focus. This is one charge over which the board has little control – it cannot be managed in the same way that production volumes, for example, can be manipulated in order to defer variable production costs. One cannot increase the productivity of a debt service cost or begin retrenchment consultations in respect of them. Rescheduling debt is a tricky business, ultimately involving a willing funder. There is no doubt that commercial banks will be willing to consider such negotiations in the right circumstances, but what happens if there is more than one bank involved? Banks love the security that is provided when a funding deal is struck – they can fight viciously over which of them can act the fastest to perfect the security and what impact will that have on the ability of the business to operate? For larger businesses, there is often the prospect of non-bank funding, such as “bonds” issued in terms of a medium-term note programme, whether these are listed or not. The rules of engagement are far from clear when a board seeks to re-negotiate the terms of these funding instruments. These are all examples of the one area that a board of directors will be very focused on, but funding pressure is often just a symptom of an underlying need for operational restructuring and this takes more time.
Faced with the imminent collapse of a business, the board of directors has a fiduciary obligation to protect all creditors and will be mindful of this when they consider whether or not they are trading in insolvent circumstances. Will there be enough skilled business rescue practitioners to cope with the volume of collapsing or collapsed businesses? In turn, will there be enough liquidators to wind up those that are beyond saving? And what of the market for distressed assets, those buyers of assets for cents in the dollar – how deep will those markets run?
I foresee a growth industry for restructuring and reorganization specialists – those who can work through the layers of lawyers, banks, asset managers, shareholders and business partners to arrive at “synthetic business rescue” arrangements. It takes nerves of steel to face down a group of bankers who want their pound of flesh, but I predict that this will be commonplace across the length and breadth of industry very soon. Many businesses will need to be radically re-imagined if they are to survive and the funding and other liabilities will need to be restructured in order to do so. Liquidations of once-sound businesses, both big and small, will increase significantly, I fear. Equally, many such businesses will need to be restructured in order to emerge as viable once again.
At the grave risk of mixing metaphors, I suggest that we have indeed crossed the business river Rubicon, in that there is no turning back to the way that we were before Covid-19. But we have not yet emerged on the other side of that great unknown. Those businesses that will perish in the river are those that are unable to restructure and reorganize themselves into something more appropriate for the changed world that awaits us on the other side. Those that emerge will look different from their former selves.
By Gavin Jones of Wax Consulting