Beyond the numbers with Grant Thornton: Listen now
Deer in the headlights – the current COVID-19 situation is unprecedented and the economy isn’t sure how to respond.
The business impacts are widespread, across all industries and sectors – and for those experiencing distress prior to the pandemic, COVID-19 could be the straw that breaks the camel’s back. However, not all is lost. In this time of change and uncertainty in the business community, hear from Said Jahani, National Managing Partner of Financial Advisory at Grant Thornton as he discusses how COVID-19 is impacting the business world, diversification versus sticking to your knitting, investor appetite and the light at the end of the tunnel.
Welcome to Boardroom.Media, my name’s Velvet-Belle Templeman and I’m here talking to Said Jahani, National Managing Partner of Financial Advisory at Grant Thornton. Said specialises in turnaround and corporate restructuring. Today we’ll be talking about the coronavirus or Covid-19 and how it’s impacting the business world, how various sectors are dealing with the impacts, and how they should be preparing.
Said, thanks for joining us.
Thank you.
Covid-19 has seen many industries and sectors upended with panic buying coupled with social distancing and the banning of gatherings of 100 or more. This is unprecedented. Said, what are we seeing in the business landscape and what does this mean for the economy?
Well, a good question to kick things off. What we’re seeing at the moment is there’s clearly a lot of uncertainty faced by businesses at the moment. Quite frankly a number of businesses, deers in the headlights, we haven’t seen anything like this before and it’s fair to assume businesses are not quite sure how to respond or how deeply they should respond or how deeply they should respond. For some, their first reaction is to cut costs, cut people in terms of the casual workforce, cancel orders, in order to try to preserve their position.
For others, it’s about how they can manage their workforce, ensure the safety of their workforce, and remain open for business, albeit in some sort of limited capacity. Others are trying to do a bit of both. Quite frankly, it’s a suck it and see approach by a lot of businesses, as they try to navigate uncertain waters.
In terms of the economy, clearly this is going to have a massive impact on our economy, whether it’s going to last for six months or 12 months is unknown at this point in time, but there’s no way our economy is going to be able to gain positive growth territory for the foreseeable future.
Said, you’ve discussed the impacts to the economy. Prime Minister Scott Morrison suggested this week that the measures they’re putting into place need to be scalable and sustainable for at least the next six months. Based on this, what do you think will happen in the business landscape in both the short and the long term?
Well, look, I think unfortunately there’s going to be a lot of pain out there for businesses and we’re expecting a significant uptick in corporate collapses.
There are already pre-Covid-19 businesses that were vulnerable or struggling, quite frankly, on the edge. Those businesses – this will probably be the straw that broke the camel’s back. What we think should happen and will happen is those businesses which are well managed and have strong balance sheets and innovative in how they deal with this crisis, should be able to weather the storm given the amount of the groundswell of support from various stakeholders such as banks in the community.
Insolvencies, as I said, will definitely go up. We expect restructuring tools like safe harbour will be more widely used by boards in order to help them protect board members from personal liability from insolvent trading.
In the longer term, I suspect we are a fairly resilient economy and community. We’ve been through various crises over the years, not quite like this, but similar to this such as SARS. So we will bounce back I think to pre-coronavirus levels in terms of business activity, it’s just a matter of how long that will take.
Now, Said, let’s talk about who this is particularly impacting. We know the aviation and hospitality sectors in particular have been hit hard, who else is feeling the pinch and what are you hearing on the ground?
Well, if you asked me that question a week ago, I would have been a bit more selective in my answer, I would have said to you the front line of who is being impacted are the sectors such as tourism, aged care, hospitality, aviation. But this thing is moving so fast and changing daily. As of today, I would say no sector of the economy is left untouched. It’s impacting every industry. In some instances, it’s impacting in a positive way. You’ve seen the rush on groceries and toilet paper, dare I say, and as a consequence that supply chain from businesses that transport for Woolies and Coles to the suppliers to Woolies and Coles, are seeing an uptick in business activity.
But unfortunately, that’s more the exception than the norm. Even in industries that you would have thought are not impacted by something like this, talking to clients who are saying customers’ accounts are at 50 per cent of orders. So quite frankly it’s impacting everyone. I mean early in the piece there was concern about businesses being able to get stock out of China when China was shut down and supply chains were closing. What we’ve found now is that supply chain opening back up because China is opening back up. The biggest issue for businesses is not necessarily supply anymore, it’s demand with customers falling off a cliff.
So you’ve talked about some pretty wide-scale economic impact there. Globally we’re hearing talk about recession. You would have been through the GFC. Are there any similarities you can see between then and now, and would lead you to think a recession is on the horizon?
Look, I think we haven’t had a recession in Australia for over 30 years, even during the GFC. I think we only had one negative quarter of growth. So whether we like it or not, the economic cycle suggests what goes up must come down and given these external shocks, it’s very likely that we will go into recession. That’s my prediction.
The one thing that hasn’t got a lot of press coverage up until now, to be quite frank, when we’re talking about the coronavirus, is one of the factors that was a big catalyst with the GFC and that was the liquidity within the financial market. When banks stop lending to each other, or when they are unable to borrow from the wholesale markets, which is what happened during the GFC, the knock-on impact of that to businesses was they had limited to no access to credit.
My forces are telling me that is now starting to happen within the banking market and the liquidity is starting to dry up and if that continues then that will actually be a double-whammy. In this instance with the coronavirus there’s a massive drop off in demand and consumer spending plus this added shock of restriction in liquidity, will mean that I think this downturn will probably be worse than the GFC.
Wow, so can we talk strategies? The federal government and most of the state governments have already released stimulus and relief for businesses. The aviation sector has just promised a $715 million relief package to keep them afloat. What’s your take of government support and what else can businesses be doing?
Look, I think it’s a good start. The reality is I think it’s just that, it’s a start. There will definitely need to be more intensives and stimulus pumped into the economy and frankly, put into the hands directly of business owners.
What we’re saying to customers and clients of Grant Thornton at the moment is the two key themes that you need to be focussed on to be able to weather the storm, is firstly, stockpiling cash by maximising your liquidity, that will buy you time. And obviously time is something that we don’t know how long this thing will go for, so that could involve all sorts of strategies such as renegotiating with your suppliers, your lenders, your landlords to get some sort of holiday or abatement in payments. It could also mean talking to your customers and making sure you understand, you know, if you thought that customer’s debtors receipt was going to come in next week, just making sure that is still the case, because customers are obviously still also feeling the pinch themselves.
Then the second key thematic that we’re helping clients with is really around their workforce. The workforce is obviously probably one of the biggest costs in most businesses in Australia today and there’s a number of different ways you can approach that. One is trying to see if you can split your workforce to protect their health and also keep the business open. Other options that we’ve been talking about is it’s a little bit drastic, but potentially putting some of the workforce on half pay and this could be done by typically agreements, but with the idea that when business levels return to normality then, businesses can then make payment of the catch-up amount that they owe employees.
So cash flow and business continuity is clearly an issue. How do businesses keep on top of this? You mentioned restructuring earlier. Is this the time to look at restructuring or diversification?
Look I wouldn’t have said diversification, I’d definitely say stick to your knitting right now. You don’t necessarily want to be looking at diversifying. Restructuring – quite possibly. It really does depend on a case by case basis and what is actually happening in your sector in your business and what liquidity you have to be able to give effect to any sort of change. What we’re saying to our clients is, right now, what you should be doing is scenario planning and we’re helping clients model out various different scenarios around how this crisis would impact their business. Depending on how deep it will go, and how long it will go and as a consequence of that scenario planning we’re then able to make, with the client, informed decisions today about how they should be managing their business.
No doubt there will be competitors who will be struggling and there may be opportunities for businesses if they have the appetite and the capacity to potentially take advantage of that but most clients that we are speaking to, even in circumstances where they feel that there may be an opportunity to acquire a competitor, are probably more focussed right now on their own business and making sure that that is well-preserved and well-protected.
Said, from an investor’s or financier’s point of view, what should they be looking out for? I’m assuming appetite to invest is shrinking.
It depends on who you speak to. So in some worlds in terms of typical financial sponsors, yes and there are pockets of money out there that specialise in investing in times like this. So they’re sort of knocking on our door telling us that they are very much open for business, have a cheque book and they are willing to provide liquidity. So it does depend on what sort of investor or financier you are. In terms of the sorts of things that you should be looking for, a good fundamental business. As I said, once this crisis is over, and it will eventually come and pass, good fundamental businesses will bounce back.
So it’s about businesses with good management teams, strong balance sheets, can generate good liquidity, potentially defensive sectors like healthcare, are the sort of businesses that will always be attractive and will always attract investment.
Said, any final thoughts you want to share in what is happening in the economy and what this means for businesses?
Look, I think just to conclude, I would say there’s obviously a lot of change and uncertainty out there and business owners and boards are going to be, as I said at the beginning, a bit of deer in the headlights and my only counsel would be don’t try and don’t think you need to do all of this by yourself, there are resources and people you can lean on for support and Grant Thornton is a great example of that. We are there for our clients, we are actively working with our customers to help them through this and give them some sage advice and see them come out the other end. So there’s no shame in asking for help. That’s probably the last piece of counsel I will leave you with.
Some great advice. Said, thank you very much for your time.
No problem, thank you Velvet.
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