Three measures for finance to address Coronavirus impact

16 March 2020 Consultancy.uk

Coronavirus is having huge impact on organisations in the UK and globally, forcing finance functions to rapidly rework financial forecasts, and safeguard financial positions and cash flows. Experts at consulting firm Zanders outline a list of practical measures for finance to consider when addressing the impact of the Coronavirus on their financial structure. 

Upcoming maturities and financing events

  • Verify the ability to postpone financing events and how this would affect liquidity and ratings
  • Prepare contingency measures if financing windows do not open in time
  • Check the availability (and conditions) of standby credit lines
  • If needed, start preparations to set up alternative temporary financing sources

Ratings and financial covenants

  • Stress testing: corporates should prepare stress test scenarios based on the Coronavirus impact to estimate headroom against rating metrics and/or financial covenants
  • Ratings: If not already contacted and asked to submit updates to rating agencies, engage in dialogue. Especially if analysis identifies a potential downgrade. Be aware that issuers have been downgraded on the back of Coronavirus and that agencies do not preclude that a downturn would trigger widespread negative rating changes
  • Covenants: Scrub financing documents for temporary measures. Such as permitted earnings adjustments and equity cures. Proactively approach lenders and syndicates. 

Supply chain, working capital and liquidity:

  • Implement cash conserving measures. In capital intensive industries, focus on capital allocation decisions to curb capital expenditures
  • Cash hoarding and supply chain disruptions may disrupt working capital balances (AP, AR, stocks) in business verticals
  • While some participants may benefit in the short term, it is likely that this will create financial weak points for others (a pernicious problem in the aftermath of the financial crisis). Business failures could impact an AR portfolio, reduce availability of factoring and can trigger business interruptions
  • Update cash flow forecasts assuming all units within the organisation will also aim to conserve cash. Re-verify the underlying business assumptions of the earnings and working capital forecast and perform stress tests to identify choke points

 

According to the experts, given that the Coronavirus situation could in the coming weeks get significantly worse before it gets better, now is the time for CFOs and finance functions to plan for the worst before hoping for the best.


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