3 April 2020

Covid-19: Protect Cash and Communicate

In this article, we provide a high level overview of steps governments have taken to date to mitigate the
economic impact of the virus and provide business owners and managers practical tips to preserve liquidity
and minimise or avoid short term distress.

Key Observations:
• Global economic fallout has been sudden and substantial – still unclear where the bottom lies but
impact likely to be significant and enduring.
• Governments have generally been quick to respond with various stimulus packages and measures for
both businesses (particularly SMEs) and individuals.
• Although no sector is immune, some will suffer more than others:
o sectors and businesses that were already suffering before the crisis will find it particularly
difficult to access funding or government bailouts;
o businesses with limited liquidity, negative operating cash flows and/or high leverage are
particularly exposed.
• In the event this crisis moves into an extended recession, short term liquidity issues risk turning into
issues of solvency.
• Proactively addressing operating and capital expenses, maximising cash and working capital, and
transparent communication and cooperation with stakeholders can help mitigate the impact.

COVID-19 Impact
The outbreak of the Coronavirus (“COVID-19”) is now a global pandemic. The financial impact in recent
weeks has been dramatic. The Dow Jones Industrial Average dropped 23.2% in Q1 2020, its largest quarterly
decline since 2008. The impact on economies is already being felt within Southeast Asia and will continue in
the coming months:
• Industrial Production and Supply Chain Disruption – China’s industrial shutdown since late January
through much of March was on an unprecedented scale, including more than 20 provinces which
represented 80% of GDP and 90% of exports. China is restarting but industrial shutdowns for all but
essential services have now commenced across ASEAN manufacturing centres, including in all or parts
of Malaysia, Indonesia, India and Australia.
• Travel and Tourism – The International Air Transport Association (IATA) forecasts revenue impact to
airlines globally of in excess of USD250 billion, while the Centre for Aviation (CAPA) forecasts most
airlines will be bankrupt by June 2020.
• Consumer Discretionary Spending – McKinsey estimates a 40-50% reduction in consumer discretionary
spending in the US as a result of the virus, roughly equivalent to 10% of existing GDP.
• Commodities Demand – The S&P GSCI (benchmark measure of commodity performance) ended the first
quarter of 2020 down 41.5%, while Brent crude fell from USD66/bbl to USD26.42/bbl (60% decline)
during the same period.
• Liquidity – As the crisis persists, the longer-term effect will be a drain on working capital assets of
companies and reduced valuations and availability of finance. Lenders, governments and regulators in
 most countries have taken initial steps to ensure it is easier for businesses to access funding (but these are
primarily focused on SMEs) and to restructure existing facilities. However, it will be difficult for
businesses that entered into this crisis with poor balance sheets to meet necessary criteria for funding and
in the event of a longer recession, short term liquidity issues risk turning into issues of solvency.

Governments’ Actions to Mitigate

Governments have generally been quick to react, announcing a variety of fiscal stimulus packages and
measures in an effort to offset the sudden and substantial economic impact:
Stimulus packages announced
Region % of Annual GDP
(USD in Billions)
Singapore 37.8 12%
Malaysia 58.5 19%
Indonesia 8.1 1%
Thailand 12.7 3%
Philippines 3.9 1%
Southeast Asia 121.0 5%
USA 2,200.0 10%
European Union TBD TBD
The measures already implemented amount to unprecedented intervention as governments attempt to
nationalise private sector losses and growing unemployment burdens. More is likely, however, it is not clear
how long this can be sustained. As the crisis drags on, emerging economies may be unable to continue to run
such large deficits, particularly without a considerable further depreciation of their currencies. When the crisis
eventually recedes, government balance sheets will likely be depleted, resulting in potential austerity measures
including higher taxes in the years to come.

Practical Steps for Business Operators

While there are certain steps policymakers and governments can take to try and mitigate the economic impact,
ultimately the survival of businesses will depend on the status of their balance sheets entering the crisis and
the decisive actions of managers now.

A focus on cash is paramount and this will likely require all stakeholders to share the burden. Some key
proactive steps include the following:

Protect your Cash

• adjust operations and cost base to reflect current economic environment – plan for extended interruptions
from COVID-19 and a prolonged period of suppressed economic conditions and be ready to decisively
implement;
• where possible, convert existing working capital (inventory and receivables) to cash. Focus on cash and
not profit – consider necessity to provide discounts or similar to liquidate;
• consider and plan for potential actions taken by customers or trading partners that will impact operations
and liquidity – just as you are, customers will change their behavior on meeting credit terms and will seek
to negotiate or exit existing contracts (including possibly, by relying on force majeure or other terms within
contracts);

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• work with key suppliers – landlords, suppliers, employees and financiers to negotiate mutually acceptable
amendments to existing agreements based on transparent information; and
• if necessary, defer certain payments altogether in the short term until there is increased certainty and
engage with counterparties at a later stage.

Access additional liquidity

• consider drawing on any undrawn debt facilities; and
• initiate early and transparent discussions with shareholders, lenders and if necessary third-party financiers
to obtain required funding.

Access available government relief

• review and consider the availability of direct government relief in each jurisdiction you operate;
• understand the government relief provided to your stakeholders (landlords, suppliers, lenders and
employees) and how this impacts on your negotiations with them; and
• government measures are being updated rapidly and you should ensure you remain apprised of any
developments.

Adapt to the crisis

• Can your business adapt its operations to meet changing needs? For example:
• industrial giants such as General Motors, Ford and Dyson are commencing production of
ventilators for hospitals;
• textile and garment manufacturers have switched from producing clothing to making personal
protective equipment for healthcare workers and the general public;
• social media companies are helping to spread accurate information from reliable sources on
updated national restrictions and ‘stay at home’ measures; and
• restaurants are switching to take-away or delivery only services to operate under lockdown
constraints while some are delivering free meals to healthcare workers or assisting to feed the
elderly in nursing homes and other institutional settings.

Early & Proactive Communications

• Transparent, early and regular communication with stakeholders is critical to obtaining the support
required to meet the impact of this crisis. Key examples include:
• asking key suppliers and landlords for short term relief on payment obligations;
• flagging that certain covenants or payment obligations will be breached on banking facilities and
collaboratively working with lenders to restructure facilities;
• working with employees to reduce leave balances, defer bonus payments and temporarily reduce
hours or salaries in order to avoid redundancies;
• requesting assistance from government bodies on how to best access the significant stimulus and
emergency support initiatives already announced by national governments – for example, what can
the government do to help you retain your staff and meet payroll obligations in the short term?;
and
• giving notice to key creditors that you simply cannot make an upcoming payment obligation but
wish to engage to come to an agreement on how you plan to rectify this.
• There is evidence that lenders, institutional landlords and other financial services companies are adopting
a realistic approach to their customers in the short term. However, businesses will not benefit unless
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 dialogue remains open and borrowers are able to demonstrate steps being taken to minimise lender risk
and a long term path to maintain solvency.

The Borrelli Walsh team has significant experience assisting distressed clients in Southeast Asia. We would
be happy to discuss how our approach can assist your firm.

CONTACTS
Jason Kardachi Ben Crilly
Managing Director, Singapore Director, Jakarta
T: +65 6603 0795 T: +62 21 3000 2217
M: +65 9101 2123 M: +62 817 649 4748
E: jk@borrelliwalsh.com E: bjc@borrelliwalsh.com

Disclaimer: The information provided in this update does not, and is not intended to, constitute accountancy, tax, investment or
other professional advice. Specific advice should be sought about your specific circumstances. Please contact the Borrelli Walsh
team at bw@borrelliwalsh.com.
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