Recovering from COVID-19 – Three options for accessing additional capital
Accessing capital is critical for achieving stability
Access to capital and limited liquidity is an immediate challenge for mid-corporates, especially in the current stage of the COVID-19 crisis, where the priority is ‘Preservation and Stability’. Our survey1 of 205 mid-corporates showed that as mid-corporates seek to stabilise their business and recover from the impact of the pandemic, they are exploring a combination of equity and debt solutions:
- 60 per cent of the respondents are looking to tap the equity markets for private equity investment, while
- 56 per cent are considering structured trade finance solutions, and
- 38 per cent are intending to restructure their debt.
The interest that mid-corporates have shown in exploring alternative sources of capital is unsurprising, since over half of those surveyed had reported receiving ‘limited financing support from traditional channels’, and faced ‘challenges in meeting existing debt obligations, as detailed in the second point-of-view in our ‘Road to Resilient Growth’ series, ‘Recovering from COVID-19: Three focus areas for improving liquidity’.
Getting access to funds in order to resume (and grow) business operations is high on their agenda, along with enhancing working capital and meeting debt obligations in the near term. As mid-corporates progress on their road to resilient growth, they need to find additional capital via funding solutions that are also consistent with their long-term strategic objectives, to support them in navigating uncertainty and disruption going forward. Given this situation, it is critical for mid-corporates to consider and evaluate both traditional and alternative sources of capital as they look to recover from the impact of COVID-19 and achieve stability.
Rethinking capital structures for a post-COVID-19 world
With the increased uncertainty and volatility brought about by COVID-19, mid-corporates now need to look inward to reassess their core competencies2 and optimise their business and funding models accordingly. Corporate finance and treasury teams will play a pivotal role in reshaping the organisation’s capital structure, to help them recover from the impact of COVID-19 and rebuild towards long-term resilient growth.
Our survey indicates that both private equity and debt are being considered as potential financial solutions, and the right balance will also position mid-corporates well to weather future disruption. In order to attain this balanced capital structure, mid-corporates can make internal changes to existing operations or capital sources to free up funds, as well as seek external sources of finance. The three options for mid-corporates to access additional capital are:
- Unlock existing capital;
- Evaluate traditional funding sources, and
- Explore alternative sources of finance.
*Note: Green and blue finance involves engaging traditional capital markets in creating and distributing a range of financial products and services that deliver both investable returns and environmentally positive outcomes (Development Asia, 2018)
First option – Unlock existing capital
In order to unlock capital and improve their long-term liquidity, mid-corporates should first look at their existing capital position and consider internal changes or actions. In the current situation, it is critical that companies identify their core competenciesii and strategic priorities before allocating capital and streamlining non-core activities. The organisation’s balance sheet would then need to be restructured, with a view towards unlocking existing capital by:
- Divesting distressed assets or non-core businesses – Optimise company assets by strategically divesting underperforming / non-core assets in order to strengthen the balance sheet.
- Postponing or revaluating any capital investment plans – Scrutinise any planned capital expenditures based on alignment to strategic vision, short-term necessity as well as criticality for building resilience.
- Considering debt restructuring options – Restructure or refinance existing debt obligations (i.e. lower interest rates, longer maturity period or interest rate waiver). A debt-for-equity swap is another option to be considered and discussed with bondholders. However, the process might be complicated if the company already has a lot of debt, whether secured or unsecured, or has a poor credit rating. With any option, a cost-benefit analysis should be conducted to assess factors that can affect their viability e.g. early repayment fees.
- Negotiate covenant waivers on existing loans – In order to allow breathing space in their cash position, companies can negotiate a relaxation of some covenants with their lenders, such as delayed reviews of leverage and interest coverage ratio.
Second option- Evaluate traditional funding sources
Despite ongoing disruption, traditional funding sources such as capital markets and commercial banks still remain viable options for mid-corporates to approach for raising capital. Mid-corporates ought to work with their banking partners to critically evaluate the suitability and attractiveness of the various capital-raising solutions that may be available. These include:
- Financing solutions from commercial banks – Mid-corporates can access an array of mid/long-term financing solutions from their commercial banking partners such as:
- Exceptional funding pools for COVID-19 – Many financial institutions have issued special funding pools to help companies manage the COVID-19 crisis. For example, Standard Chartered has committed to USD1 billion of financing for companies which provide goods and services to help the fight against COVID-19 and those planning the switch into making products that are in high demand to fight the global pandemic. Read more about corporates around the world that have benefitted from this fund.
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- Syndicated loans, leveraged finance and structured trade finance
- Asset-based lending for companies with strong asset position to cover expenses or investments with lower ongoing cost and higher flexibility.
- Fund raising via capital markets – Both debt and equity markets are potential avenues for mid-corporates to raise additional capital, by:
- Issuing convertible bonds to raise funds. These offer investors the relative reliability of bonds with the option and flexibility of converting debt to equity, while allowing issuers with low or no credit ratings easier access to cash as compared to a regular bond issuance.
- Exploring green/blue financing options for sustainability-linked initiatives and businesses. This involves investing in or lending to companies for projects that consider environmental impact and enhance sustainability. For example, companies can issue a blue bond to raise capital from investors for financing their marine and ocean-based projects with positive environmental and economic benefits.
- Issuing stocks via secondary offering or convertible preferred stock.
Third option- Explore alternative sources of capital
To access new capital, mid-corporates can also explore a range of non-traditional or alternative sources, provided that they carefully evaluate their options from a strategic and longer-term perspective. Having the right partner in place will not only help mid-corporates with their immediate capital requirements but also in driving resilient growth in a post COVID-19 world. Some of these potential avenues are:
- Accessing private equity (PE) funding – According to our survey of 205 mid-corporates, 60 per cent of respondents are considering approaching PE firms for investment. PE firms currently have significant capital available and are looking to invest in high-potential companies seeking funds. The mechanisms for fund infusion may vary, with some companies choosing options such as ‘hybrid capital’, which allow them to secure investment on more flexible terms, yet do not dilute shareholder value.
- Consider strategic investors within existing supply chain – Find potential strategic investors within the current supply chain, such as key suppliers, buyers and investor groups, to raise capital.
- Tap into government financial schemes: In addition to immediate schemes made available to businesses through initiatives such as job support, tax payment deferrals and rental waivers, mid-corporates can also explore additional financial schemes offered by governments which are comparatively wider-ranging, such as corporate financing provisions or loan guarantees.
Leveraging capital to accelerate the journey towards resilient growth
Mid-corporates need to focus on accumulating capital to navigate Stage 2 (‘Preservation and Stability’) as well as for investing into strategic initiatives as they look towards entering Stage 3 (‘Preparing for Growth’) of the ‘Road to Resilient Growth’. Concentrating on the organisation’s core competenciesii – and being supported by the right strategic and financial partner – will be critical for success.
The next point-of-view in our series will cover manufacturing and supply chain capabilities, and how mid-corporates can better manage disruptions to operations and the broader supply chain in order to continue delivering value to customers.
1 Survey commissioned by Standard Chartered in June 2020 and completed by 205 mid-corporates (annual revenue USD100m-500m) based in Mainland China, Hong Kong, Singapore, Malaysia and India.
2 Core competencies differentiate an organization from its competition and create a company’s competitive advantage in the marketplace. Typically, a core competency refers to a company’s set of skills or experience in some activity
Accessing additional capital in a crisis – Solutions for mid-corporates
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References:
PwC, ‘Looking beyond the short term: funding the future’
PwC, ‘Funding for the future: Preparing scenarios and disclosures’
Standard Chartered, ‘We’re committing USD1 billion to finance companies helping to tackle COVID-19, March 2020
Standard Chartered, ‘Moving Past COVID-19: Best practices for Treasurers’, July 2020
EuroFinance, ‘Managing treasury through the Covid-19 crisis’, April 2020
EuroFinance, ‘Before and after Covid-19: What can Treasurers expect?’, March 2020
Euromoney, ‘Private equity bets on post-Covid survivors with hybrid capital’, May 2020
This material has been prepared by PricewaterhouseCoopers Consulting (Singapore) Pte Ltd. (“PwC”) at the request of Standard Chartered PLC and its affiliates (“SC Group”) in accordance with the agreement between PwC and SC Group. Other than to SC Group, PwC will not assume any duty of care to any third party for any consequence of acting or refraining to act, in reliance on the information contained in this report or for any decision based on it. PwC accepts no responsibility or liability for any use of this report by any third party, including any partial reproduction or extraction of this content.