12 ★ FINANCIAL TIMES Wednesday18 March 2020
People hoard when hard times lie
ahead. Like shoppers stripping bare
supermarket shelves, companies are
pulling down credit lines while they
can. Panic buying is frowned on.But
big brewerAnheuser-Busch InBevhas
already dashed to claim a first-mover
advantage.
The need for cash is urgent in sectors
worst hit by the Covid-19 outbreak,
including oil, airlines and hospitality.
They have rushed to trigger revolving
credit lines providing pre-agreed
amounts. Banks are braced for many
more instructions. “Revolvers” total
$729bn for non-financial companies
rated by S&P, some 6 per cent of all
corporate debt.
This week, AB InBev opted to draw
down all of a $9bn loan facility. It is not
stretched; it had $6.6bn of cash at the
end of 2019. Though heavily indebted
after big buys, it has just $3bn of bond
debt maturing in 2020. Its sales will be
hit by the closure of bars, but the off-
trade may hold up. Brokers Jefferies
estimates 2020 free cash flow could be
down by a fifth to $6.9bn from a year
earlier. Painful but not unbearably so.
The group has squeezed customers
and suppliers hard in recent years. It
will probably now need to extend more
generous payment terms. Moreover, its
debt pile will weigh heavily if the virus
outbreak is extended. Net debt-to-
ebitda was 4.5 at the end of last year. A
reduction of a fifth in 2020 ebitda
would push it to 5.8, says Jefferies.
There are good reasons for groups to
stock up with cash. Even if a credit line
is agreed, a company that breached
covenants might be refused the cash.
Unexpectedly high credit line
drawdowns were part of the “run” on
banks in the financial crisis. Some
lenders rescinded credit lines.
This time round, banks are better
prepared. Still, the drawdowns increase
banks’ exposure to troubled industries.
New accounting standards that require
lenders to provide upfront for likely
AB InBev/credit lines:
plan for the worst
future loan losses will intensify the
pain. Panic borrowing, like panic
buying, makes shortages inevitable.
If a company as steady asCompassis
hurt by coronavirus, no business is
immune. The restaurants of the big
caterer feed everyone from Aussie
miners to champagne-quaffing bankers
at Wimbledon. The outbreak is closing
workplaces and cancelling events.
The half-year operating profit of the
group could be £225m, 20 per cent,
lower than forecast. London-listed
shares mirrored that, falling a fifth.
Yet Compass is in abetter position
Compass Group:
kitchen nightmares
than many businesses, says a Covid-
update, an increasingly common piece
of market disclosure. Leverage is low;
net debt as a ratio of ebitda was under
two times at the end of last year.
Covenants allow that to double. It has a
£2bn credit facility. Last year, profits
covered interest payments 14 times.
Its quality balance sheet, a legacy of
former bossRichard Cousins, sets it
apart. Announcements from rivals
Sodexo,EliorandAramarkcould be
far less palatable. Aramark’snet debt
to ebitda was close to five times and
operating profits were just twice
interest payments last year.
All catering businesses are exposed
to the closure of restaurants in
workplaces and educational buildings.
Geographical exposure, however, will
differentiate the timing of their
misfortune. Only about a fifth of
Compass’s revenues come from
Europe, which is struggling to contain
the virus. The US, where it is at an early
stage, accounts for two-thirds of the
remainder. European exposure for
Sodexo and Elior is higher at 37 per
cent and 85 per cent, respectively. Elior
generates 10 percentage points of that
in Italy. Aramark of the US generates
the bulk of revenues at home.
How far Compass profitsfall depends
on the scale and duration of a US
outbreak. Yesterday’s update suggests
revenues are currently at half previous
levels. Bernstein analysts think that
gives Compass four months before it
nudges up against covenants. Given the
speedof the havoc wreaked by the
virus, that leaves even the best-in-class
looking vulnerable.
Unemployment has a far bigger impact
than mere loss of wages. Just ask Sajid
Javid, languishing on the Tory
backbenches since he stepped down as
UK chancellor. It was left to successor
Rishi Sunak to unveil one of the largest
state interventions ever seen in the UK.
Mr Sunak discharged a bazooka
against a small but insidious foe:
coronavirus. Last week, a £13bn
stimulus looked hefty enough. Just a
few days later, with multinationals
spiralling towards bankruptcy, a
package of guarantees and loans worth
over £330bn looked unexceptional.
The finance minister sketched plans
for workers’ income support with the
softest of pencils. A pity, since this is
the element of the state’s bailout for the
private sector that matters most.
Businesses should be able to cover
the hole blown in their cash flows by
the epidemic with soft loans and
guarantees; net UK company debt is
under £500bn. But the spectre of mass
redundancies still beckons. The knock
to confidence could turn a brief
downturninto a grinding recession.
Mr Sunak is relying on his Mario
Draghi-like willingnessto reassure
workers. A three-month mortgage
holiday for borrowersis just an opener.
Targeted wage support must cover the
same period. It is ironic that the
government that allowed the collapse
of regional airlineFlybemay be willing
to bail outeasyJet. Crises are not the
time to worry about moral hazard,
though, as the rescue of UK banks in
2008 showed.
Back then, investors hardly escaped
scot free. This time, shareholders must
balance the survival chances of their
companies with possible equity
dilution again. Taxpayers could expect
equity upside in return for bailouts.
To summarise: an administration
that has defeated pro-nationalisation
socialists in an election is rolling
forward the state’s frontiers. A party
that espoused austerity could push
public sector debt towards 100 per cent
of GDP. It is an extraordinary U-turn.
In extraordinary times, it is justified.
UK bailout/Sunak:
son of Mario
Donald Trump says the cheques are
coming. Perhaps $1,000/month to
Americans; perhaps more. The amount
is not settled yet but for once the
president’s might stands to match his
bombast. The funds cannot hit the
bank accounts of citizens soon enough.
The US economy has never before
been so precipitously halted, with most
citizens hunkered down at home. Bars
and restaurants are effectively shut.
HotelierMarriotthas furloughed
thousands of staff. Shoals of mom-and-
pop restaurants will be unable to make
this or next month’s rent. Scarily, a fifth
of Americans already know of at least
one person who has lost their job,
according to a survey. Scars from the
financial crisis show that money
flowing directly to consumers — not
through complex tax schemes — works
best. That is particularly the case with
moderate-income folk, who tend to
have 100 per cent consumption rates.
That’s a helpful foible in times like
these. The $850bn aggregate figure
contemplated by Washington
represents less than 5 per cent of
annual GDP. That may prove
inadequate. But it is at least a start.
The trickier question will be how to
aid private-sector businesses — or even
why to do so. Consumers will not
distribute their stimulus checks evenly.
The US airline industry, for example,
is reportedly asking for $50bn to
weather the next months. Airlines have
notorious operating leverage. A strong
economy and consolidation has helped
revive the sector. The three legacy
carriers —United,American, andDelta
— have been sufficiently robust to buy
back shares and pay dividends. In mid-
February the trio had a collective
market capitalisation of $70bn.
That figure, a month later, has been
nearly halved and probably includes
the expectation of a bailout. That is
dwarfed by the trio’s net debt, which
stands at $60bn. The airlines depict
their dire straits as more about
liquidity than solvency. Regardless, any
government-backed liquidity
programme will prop up their solvency.
A viable industry can be considered a
social good, but that will not stop
taxpayers from howling. The best
response is to grant taxpayers equity,
ideally preferred equity. That solves
US stimulus:
send the helicopters
two issues. It lets taxpayers — who
bankroll bailouts — share in rewards as
well as taking the risk. Secondly, by
diluting existing owners, it shows even
in extraordinary times, government
aid does not come scot-free.
CROSSWORD
No. 16,428 Set by GOZO
JOTTER PAD
All the Across clues and 3 Down
lead to a thematic solution and
each lacks a thematic definition.
ACROSS
1 Black or white in the States –
one and the same (8)
5 Morning in the sticks, for
starters (6)
9 Made out leading racing hound
(8)
10 German, not bad. That’s odd (6)
12 Cockney fellow’s present (5)
13 A little lost, when old – losing
one’s head (5,4)
14 Half the season’s over for sure
(6)
16 Suspend wife inside house (5,2)
19 Role which includes Romeo and
Joiner, in French (7)
21 Tennis champion knocking back
drink by bar (6)
23 Reports of posh cargo on
Stockton’s river (9)
25 Some terrain owls return to
regularly (5)
26 Front runner coming second (6)
27 Young girl, topless siren (8)
28 The same practice areas (6)
29 Singer at spa (8)
DOWN
1 He’ll take drivers round the
course (6)
2 Strangely regrettable that non-
drinker leaves this drink (5,4)
3 Sound of horse or injured heron
(5)
4 US actress dispensed with on
the radio (7)6 Stuffing husky and rodent, we’re
told (9)
7 New name given to one strait
(5)
8 Remained and organised video
nasty, but six left at the start
(6,2)
11 It’s almost dark – almost! (4)
15 Examination of slide, most
clever to conceal drug (5,4)
17 Appreciation of view expressed
by King George? (9)
18 Transpired to have copied
bearing fruit (8)
20 Thank you note for collection of
pictures (4)
21 Footballer Lionel, a hot
favourite at Christmas? (7)
22 Lowly soldiers face losing leader
(6)
24 Leader’s lodge (5)
25 Not the winner in a close race
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Lex on the web
For notes on today’s breaking
stories go towww.ft.com/lexTwitter:@FTLex
With coronavirus tightening its grip,
the past few years look like a lost
golden age for US healthcare groups.
The 2010 Affordable Care Act
brought an influx of new business.
Consolidation allowed companies to
wring out costs and charge higher
prices. The big five insurers —
UnitedHealth,Anthem,Cigna,
HumanaandCVS Health—raked in
a record $33.1bn in profits on $820bn
of revenues last year.
The pandemic will impose huge
strains on a healthcare system, where
efficiency is low and rent-seeking is
high.Much of the US workforce has
retreated into self-enforced isolation
in an attempt to slow the pandemic.
It is tough to calculate the financial
impact on such an opaque, multi-
layered labyrinth as the American
healthcare system. Washington has
ordered insurers to cover the cost of
virus testing. That varies according to
manufacturer and lab, but assume a
range of $500 to $1,500. If just 5 per
cent of the US population, 16.5m
people, get tested, that implies a
financial hit of $8.3bn-$24.8bn.
A bigger unknown is the severity and
resultant hospital admissions costs.
A severe outbreak hospitalising 4m
people would cost insurers $80bn,
according to S&P Global. A moderate
outbreak, comparable with a severe flu
season, drops the bill to about $17.6bn.
Still, insurers have some leeway on
the financial side. Some costs will be
offset by the postponement of elective
surgery as people stay indoors. The big
five insurers, which spent $18bn on
share repurchases and dividend
payments last year, can also suspend
stock buybacks to preserve capital.
And even if coronavirus threatens
this year’s profits, insurers can push
up premiums next year. The biggest
threat to insurers’ profits is political.
The virus is shedding more light on
thehealth system’s failings. Millions
remain uninsured. Costs are rising for
those with cover. High deductibles
and co-pays, a complex system of in-
network and non-network providers,
and an expansion of middlemen all
serve to snag the system.
The outbreak will show how poorly
Americans are served by their
markets-based healthcare system.
Reform may follow.
FT graphic Sources: Peterson KFF; S&P GlobalUS health expenditure
tn
Prescription drug
Physicians & clinics
Hospitals
Potential impact on US health system
Moderate
pandemic scenarioSevere pandemic
scenarioPatients hospitalised (m) Hospital costs ( bn)
Medical bills top list of public worries
Very or somewhat worried ( of respondents)
Unexpected medical bills
Prescription drug costs
Rent or mortgage
Transport costs
Health insurance premiums
Food bills
Feb
US healthcare industry: crisis will expose flaws
Hospitals, benefits managers and insurers have all benefited from rising spending on healthcare. The system
faces two tests. First, dealing with a worsening coronavirus outbreak. Second, coping with political fallout if
Americans on low or modest incomes are denied adequate treatment.
MARCH 18 2020 Section:FrontBack Time: 17/3/2020-19:09 User:julian.summers Page Name:1BACK, Part,Page,Edition:EUR, 12 , 1