Financial Times Europe - 13.03.2020

10 ★ FINANCIAL TIMES Friday13 March 2020

With the latest James Bond movie

delayed, cinema owners are shaken but

not quite stirred. The coronavirus

outbreak is yet to hitCineworld’s ticket

sales. But were the second-largest

operator’s theatres to shut for months,

it would risk breaching its debt

covenants, it said in full-year results.

ineworld’s leverage is a cause forC

concern. Its net debt-to-ebitda ratio is

4.1 times including theacquisition fo

Canada’sCineplex. But that excludes

lease liabilities. There is little chance of

unwinding the Cineplex deal after

passing a shareholder resolution.

Covenants on its loans have limits of 5.

times net debt-to-ebitda to the end of

2020 (excluding lease liabilities). Lex

calculates if ebitda falls by a quarter,

Cineworld would breach its covenants.

Before the pandemic plot twist,

Cineworld was already getting

investors on the edge of their seats. In

2019, the proportion of stock loaned

out toshort sellers ose to nearly 20r

per cent. They were betting on a box

office in structural decline as viewers

ditch the big screen for streaming

services. Shares fell further yesterday.

People need entertaining during

quarantine. During the Spanish flu in

1918, punters in London flocked to

Charlie Chaplin’s filmShoulder Arms.

But the US shut theatres. To date, the

focus has been on preventing large

gatherings, rather than cinema-scale

ones. That will change.

China and Italy ave shut cinemas.h

Containment calls for something more

like Netflix. That will weigh on

Cineworld’s cash generation. For its

part, Cineworld says its costs nda

capital expenditure can quickly be cut

to almost zero. That seems optimistic.

Even without closures, Cineworld

will feel the squeeze, as more film

releases are delayed.Buying Cineplex

has come at the worst time, like any

Bond villain worth his or her salt. If the

spread of coronavirus goes unabated,

the indebted Cineworld will find itself

Cineworld:

pandemic plot twist

feeling as uncomfortable as Mr Bond in

Goldfinger trapped to a tables

underneath an industrial laser.

Shambolic UK-listed financial services

groupFinablr s afflicted by many ills.i

It is suffering from coronavirus, a

computer virus and good old-fashioned

bad management. The key business of

its currency exchange unit,Travelex, is

to move cash around. Unable to do

that, it is running out of the stuff. The

prospect of a liquidity crisis sent shares

tumbling 60 per cent yesterday.

Travelex has been hit by IT outages

that started last year and were still

Finablr/Travelex:

debasing the currency

recurring 10 days ago. Finablr needs

funds, but borrowing will be

problematic. Travelex bonds that were

already junk-rated were further

downgraded by credit agencies last

week. S&P’s CCC rating is just three

notches above imminent default.

Investors have fast lost confidence in

ownerBR Shetty. News that his other

London-listed venture,NMC Health,

has $3bn of hidden debt will not help.

Finablr’s underlying problems will

make resuscitation near impossible.

Dr Shetty used most of hisholding in

Finablr as collateral for loans in

January. The terms of those deals

remain private via his financing vehicle

BRS Ventures. But if they default, as

credit analysts fear, he could lose

control of Finablr. That would also

trigger a change of control clause in

bonds and mandatory repayment of

almost $400m of notes, around a third

of Finablr’s total debt.

Finablr was supposed to move into

the black with net income of $60m and

ebitda of $267m. Those assumptions

are void. If Travelex defaults, Finablr

will need to tap cash reserves to lower

debt. These were $486m, the company

said last June. On those assumptions,

net debt was a toppy three times

expected ebitda. As travel disruption

continues, earnings will degrade. That

will push the ratio higher.

It is extraordinary that a business

floatedless than a year ago has cratered

so quickly. The sponsors and advisers

who brought it to market cannot be

blamed for coronavirus. But they bear

responsibility for vouching for a

company that has proved so flawed.

Big commercial banks have become

leading participants in equity offerings

and M&A, using their hefty balance

sheets to extend cheap, deposit-funded

credit to corporate clients. For banks,

landing the deals justifies the modest

interest rates charged and the

regulatory capital costs. Clients can

then be cajoled into using the bank’s

services for more lucrative advice on a

blockbuster acquisition or share sale.

But the big banks are about to feel

the boomerang effects of this soft quid

pro quo. In the midst of a market

meltdown, there is littledeal activity

afoot. Adding to the consternation for

banks,corporatessuch asBoeing rea

starting to draw on committed

financings, such as revolving credit

facilities and term loans. It is a savvy

move on companies’ part: hoard cash

while it is still plentiful and cheap. But

these moves will add to the frustration

of banks already buffeted by a slowing

economy and falling interest rates.

Reports on Wednesday said that

Blackstone nd other large privatea

equity firms were advising portfolio

companies to draw on previously

committed bank financing to shore up

liquidity as a precaution. Boeing,

already reeling from the 737 Max

scandal,had arranged or a near $14bnf

loan a few weeks ago and this week

decided to draw down the full amount.

United Airlines aid yesterday that its

would borrow $2bn worth of term

loans in a financing led byJPMorgan.

JPMorgan has more than $400bn of

unfunded credit commitments

outstanding, its filings say. These loans

are priced at spreads over Libor (often

putting in a minimum of 1 per cent if

Libor falls lower). The loans are

secured against collateral, such as

aircraft in the case of United, and are

typically senior to bonds. Still, with the

ugly rout in equity and bond markets,

so-called equity cushions arethinning.

For the most troubled groups, banks

risk getting caught up in distress or

bankruptcies. Still, most of these loans

will be repaid. Banks can only hope

their loyalty will be rewarded as well.

Bank credit lines:

what friends are for

“In the event of a decompression, an
oxygen mask will automatically appear
in front of you.” So run inflight safety
briefings. Airline chiefs could do with a
reviving blast of air themselves. A US
ban on travel from Europe will further
choke off their revenues.
Donald Trump perceives America as
a fortress, given fewer cases of
coronavirus. But this reflects a lack of
testing in the US. Banning flights from
26 European countries will do little to
halt infection, even as it spreads
financial contagion.
The presidential proclamation
extends the woes of European airlines,
whose shares nosedived on the news.
That region provides the largest source
of arrivals into the US: 39 per cent last
year, according to International Trade
Administration data. Nearly half of the
travellers come from Germany, France,
Italy, Spain and the Netherlands. A UK
and Ireland travel ban may follow.
Lufthansa nda Air France-KLM illw
be worst hit, but US carriers such as
Delta ir Lines and United will sufferA
too. Those four account for almost
two-thirds of US inbound scheduled
flights in March from the Schengen
area, says Bernstein. Cargo movements
will be hurt too, damaging US supply
chains. Cargo flights are exempt from
the US ban. But half of global cargo
travels in the holds of passengerjets.
The comingweeks will prove critical
for airlines financially. What matters
now is cash flow and cash on hand.
Bosses and investors usually think in
terms of financial quarters. Right now,
they need to think in days and weeks.
Can airlines source enough working
capital to tide them over? Workers look
forward to payday. Executives will now
be dreading it as a cash crunch.
Suppliers are in trouble too. Jet-fuel
demand is falling rapidly. The
transatlantic ban should knock
another 9 per cent off declining 2020
jet-fuel demand, says Rystad Energy.
Airport businesses have their own
woes.WHSmith, which runs snack and
travel accessory shops at airports and
stations, yesterday lopped nearly a
tenth off this year’s revenue outlook.
Some of Europe’s flag carriers will
soon need bailouts. US airlines may
need a safety net of their own. Discount
long-haul specialistNorwegian Air

US travel ban/airlines:

assume crash position

Shuttle annot even count on that. Thec

business is unlikely to continue in its

current configuration.

Airline investors who have not

already done so should follow the signs

to the emergency exits.

CROSSWORD

No. 16,424 Set by WANDERER

  

 



 

  



  



 

 

 

JOTTER PAD

ACROSS

1 Where churchwarden might be in

quiet period during harvest (4,4)

5 Fully takes stock of situation after

heading off from busy pub, drunk

(4,2)

9 Sole trader might have this long

game to play? (8)

10 One taking a lot of interest in

American rivers (6)

12 Fish from the flipping South Pole!

(5)

13 Like one of Elgin’s sculptures

displaying male member (nothing

substantial) (9)

14 Frank confession such as I

possibly heard? (6)

16 Sort of jumper worn by model

backing skilled craftsperson (7)

18 Metal from cans (not tin,

contrarily) (7)

20 Where there’s an “f” in “fielder”

(3-3)

22 Ten replays without a foul now!

(9)

23 Split personality? Actor has that

off (5)

24 Sort of music that’s sung in church

or alehouse (6)

25 Country fellow following river

before Italy meets Austria (8)

26 Notice £500 during emptying of

safe? Put it on a horse! (6)

27 Primarily censoring material,

editor used blue pencil? (8)

DOWN

1 Cut up about Frenchwoman

getting hit repeatedly (6)

2 Prison door, a revolving one

offender’s beginning to exit in one

of the 7 (11,4)

3 Sexually fondles topless guys? (5)

4 Purgative requiring vacant loo in

plane (7)

6 Surprisingly outspent by

daughter? Not noticed (9)

7 Number of ways to get around a

big city (7,2,6)

8 One of the 7 seen from on board

old ship? (4,4)

11 Field of barley, as seen in prime

spots only (4)

15 Short holiday: what everyone

needed in one of the 7 (9)

17 Diamonds? They’re in these cool

bags! (8)

19 Subject of US participating in

scam at Harrods (4)

20 Ex-PM just seen in an 11 of

upmarket 7 (7)

21 One of the 7 some just ran down

(6)

23 Cantankerous? That’s not right

for one with knowledge of the 7,

perhaps (5)

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Solution 16,

Lex on the web

For notes on today’s breaking

stories go towww.ft.com/lex

Twitter: FTLex@

The UK Budget was heftily freighted

with measures to support businesses

hurt by coronavirus. One notable

omission was any state bolstering for

credit insurance. Withdrawal of

cover, which typically guarantees

payments to suppliers, is an

important indicator of financial

stress in an economic downturn. So

says Andrew Bailey, the Bank of

England’s new boss.

The spread of Covid-19 allows the

industry to show it has cleaned up its

act since the last crisis. Back then,

critics attacked credit insurers as fair

weather friends. Like banks, they had

handed out umbrellas when the sun

shone but wanted them back when it

rained. The removal of credit cover

was a tipping point for several

struggling companies, heralding a

death spiral. When credit insurance

started to be withdrawn onGeneral

Motors nda Ford, it briefly endangered

the European operations of those two

US businesses.

Somegripes ere unfair. Insurersw

typically pulled cover on contracts to

supply businesses that were already in

trouble. Even so, there is a case for the

industry to answer. Insurers made too

many panicky decisions last time

round. Industry bosses say that they

now have access to more data; risk

assessments have improved.

The industry is dominated byEuler

Hermes, owned by Germany’sAllianz,

Coface f France ando Atradius, part of

Spain’s GrupoCatalana Occidente.

Europe accounts for the vast majority

of the €8.4bn premiums paid globally

a year. Even in Europe, there are big

gaps. Turnover covered amounts to

about 6 per cent of gross domestic

product, an EU estimate shows.

However well the credit insurers

perform, it would be a mistake to rely

on them to smooth disruptions in

supply-chain finance during the

Covid-19 crisis. Governments have a

crucial part to play. In Britain, a

starting point would be the revival of

the 2009 scheme totop up xistinge

trade credit insurance policies.

A successor scheme should be

more ambitious. Central banks can

do little to boost demand. Credit

guarantees can at least stop supplies

to weakened businesses coming to a

grinding halt.

FT graphic Sources: Coface; Capital IQ, company; Euler Hermes

Trade credit insurance prevalent in Europe

Penetration (measured by market value*/GDP)

EU

China

Canada

Japan

US

     

Three companies dominate Europe

Year to end  (bn)















Euler Hermes Grupo Catalana

Occidente - credit division

Coface

Revenues Operating profit

Insolvencies peaked in the financial crisis

Euler Hermes Global Insolvency index (annual  change)

-

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Budget/credit insurance: state backstop needed

This specialist cover protects companies against non-payment of invoices by their customers. The Covid-

pandemic is likely to focus attention on its role, as happened in the financial crisis. Back then, the abrupt

withdrawal of cover was blamed for corporate collapses. The largest credit insurers are all European.

MARCH 13 2020 Section:FrontBack Time: 12/3/2020- 18:36 User:karen.crawcour Page Name:1BACK, Part,Page,Edition:EUR, 10, 1