Testing your capital agenda amid COVID-19

We are currently in an unprecedented global crisis, and every country is struggling to deal with outbreaks of COVID-19 in their respective jurisdictions. Luzon is still in the midst of an enhanced community quarantine with other parts of the country rapidly following suit. We are faced with rising COVID-19-positive cases with our frontliners and health care system being pushed to the limits.

The pandemic has brought massive disruption to our daily lives and livelihoods; businesses are being shaken all around the world. The pandemic-related disruption presents different and more complex challenges compared to typical business disruptions in the dimensions of scale, velocity, duration, workforce shortage, external coordination and infrastructure availability.

As private companies continue to grapple with the evolving situation, they have to be proactive and predictive in their decision-making to preserve continuity and build resilience. It is more imperative now to test the companies’ commitment to their Capital Agenda. Our EY Capital Agenda framework presents COVID-19 considerations for companies to consider in today’s current business predicament.

INVESTING — BUY AND INTEGRATE
1. If you are in the middle of an acquisition:

a. Consider the impact on the closure process — should you close early or postpone the acquisition?

b. Ask for further scenarios that stress test the original assumptions underlying the maintainable earnings, cash flows and cost implications.

c. Revisit the robustness of your supply chain set up, working capital and short-term liquidity risks.

d. Reconsider the overall synergies and your other exposures.

2. If you are in the middle of a major capital program:

a. Revisit the feasibility of the entire project;

b. Revisit the revenue, cost estimates, and project timelines;

c. Review any delay exposures, liquidity damages and mitigation options.

3. Look for new business models and emerging investment opportunities.

DIVESTING — SELL AND SEPARATE
1. If you are in the middle of a divestment:

a. Assess the impact on the forecast cash flows, working capital, profitability and balance sheet of the business to be sold.

b. Assess the robustness of the supply chain set-up.

c. Assess the timing of the sale, the impact on the potential buyers, and pricing expectations.

d. Increase the frequency of reporting the overall results, risks and mitigating factors through data and smart analytics to the potential buyers.

2. If you are in the middle of a fund-raising exercise:

a. Reconsider the pricing and timing of the transaction, especially if it is through public markets.

b. Reconsider the purpose, timing and deal terms.

c. Explore alternative options.

3. If the business is significantly impacted, then management will need to assess the company’s short-term liquidity needs and funding options.

OPTIMIZING — CORPORATE FINANCE
1. Review the supply chain resilience:

a. Consider inventory levels for critical components.

b. Anticipate possible supplier disruptions and consider alternatives.

c. If multi-sourced, optimize production and logistics locations from impacted cities to alternative locations.

2. Scenario plan for short-term and medium-term recovery cycles.

3. Explore synergies across your business portfolio by leveraging common customers, suppliers and financing sources.

4. Explore restructuring options for the capital base — e.g. share buybacks, debt restructuring.

5. Explore cost/financing mitigation options embedded in existing contracts, insurance arrangements and government incentive programs.

PRESERVING — RESHAPING AND RESTRUCTURING
1. Consider employee well-being, communication and continuous engagement.

2. Prepare for multiple scenarios with staged action plans for prolonged employee and customer commitment, and supply chain disruptions.

3. Set up short-term cash flow monitoring; scenario plan for short and medium-term disruptions to the business and assess your cash flow needs.

4. Assess working capital management measures; proactively plan and intervene to prevent inventory build-up and collection challenges for receivables.

5. Immediate implementation of cost savings and profit improvement plans.

6. Review the impairment risk of assets; anticipate any potential breach of financial covenants.

7. Undertake deep supply chain risk assessments.

Anticipating, planning and forecasting for business disruptions are already complex and difficult exercises, but companies traditionally have past experience, conventional wisdom and corporate finance tools to guide them. However, in this unprecedented crisis, it may prove impossible to some.

Despite the challenges, however, companies need to take stock of their current business models, plan for recovery, and prepare for a new normal once the pandemic has been contained and, eventually beaten. After this crisis is over, those who will emerge are those companies that are resilient and agile enough to reshape their business models as they prepare for a post-COVID 19 world.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views reflected in this article are the views of the author and do not necessarily reflect the views of SGV, the global EY organization or its member firms.

 

Marie Stephanie C. Tan-Hamed is a Transaction Advisory Partner of SGV & Co.