FRONT STORY CORONAVIRUS HITS MARKETFirms urged to draw down RCFs
Moody’s says 9% of 920 EMEA firms reviewed have high exposure to virus
Airlines, cruise companies have already drawn RCFs
Borrowers under pressure from travel
restrictions and business closures put in
place by governments in an effort to
contain the spread of the coronavirus
should draw down on their revolving
credit facilities immediately, even if they
do not have an urgent liquidity need, debt
advisers said.
#OMPANIESûBEARINGûTHEûlNANCIALû
impact from the coronavirus outbreak
such as AB FOODS, operator of clothes
retailer PRIMARK, and home improvement
retailer KINGFISHER have assessed their
liquidity as they try to actively manage
the situation.
AB Foods said that its stores in France,
Spain and Austria now closed until
governments permit them to re-open. The
closed stores generate 30% of Primark’s
SALESû-EANWHILE ûALLûûOFû+INGlSHERSû
Castorama and Brico Depot stores in
France and all 28 of its stores in Spain have
closed.
"OTHûCOMPANIESûHAVEûSUFlCIENTûLIQUIDITYû
and substantial undrawn revolving credit
facilities. ABF has a £1.2bn RCF that is due to
MATUREûINû*ULYû ûWHILEû+INGlSHERûHASû
access to two undrawn RCFs totalling
£775m comprising a £550m RCF maturing
in August 2022 and a £225m RCF maturing
in March 2022.
Asked whether corporate customers were
drawing on their credit lines during the
TURBULENTûTIMES û"ARCLAYSûlNANCEûDIRECTORû
Tushar Morzaria said: “Absolutely, you
would expect corporations with such a
sudden sort of jolt to the economy to
themselves want to get defensive and draw
down cash lines where they can. And we are
seeing a bit of that.”
He said when draw-downs take place,
“most of that cash actually ends up back on
the balance sheet anyway”. He said the bank
was not seeing any surprises in terms of
credit risk.
WILLIAM HILL and GVC HOLDINGS are among
many betting companies that are bracing
for the impact of the postponement of
several major sporting events, such as the
European Football Championship and the
French Open tennis tournament.With substantially fewer sporting events
expected in 2020, both companies expect a
material impact on Ebitda.
William Hill is working with its banks to
enhance its liquidity. The company has
access to an undrawn £425m revolving
credit facility that is due to mature in
October 2023.
GVC, which has been forced to close of
some of the company’s shops, has access to
an undrawn £550m revolving credit facility.
4HEREûISûAûlNANCIALûCOVENANTûOFûAûMAXIMUMû
4.0 times net debt to Ebitda, which is only
tested when 35% or more of the RCF is
drawn. GVC also has access to £260m of
existing cash.
While none of these borrowers have
drawn on their RCFs yet, debt advisers
say it is imperative that they should act
fast.
“Companies should be doing this whether
there is an immediate requirement or not,”
said one debt adviser. “Companies should
draw on all the liquidity they have.”
“At the moment banks are in PR mode –
they are saying that they will help, but we
don’t know what the future holds and what
sort of pressure they will come under. I have
seen this happen before, companies say they
don’t need the revolver and then they
change their minds and it’s too late,” he
said.LIQUIDITY IS KEY
In a report published by Moody’s on
Tuesday, the ratings agency said it estimated
about 9% of the 920 companies it reviewed
in EMEA have high exposure to the effects of
the coronavirus outbreak, while 54% have
moderate exposure and the rest have low
exposure. It said the impact on the credit
quality of the most exposed companies
would depend on their liquidity and ability
to adapt.
“The sectors with high exposure,
including autos, passenger airlines,
shipping, lodging, leisure and restaurants,
will face the greatest earnings pressure.
However, the effect on their credit quality
will depend on their ability to adapt their
OPERATIONSûANDûlNANCIALûPOLICIESûANDûTOûmaintain adequate liquidity,” the report
said.
Borrowers in the most heavily impacted
sectors have already begun drawing down
on their revolvers. Earlier this month, AIR
FRANCE-KLM announced it had drawn down its
€1.1bn RCF to boost liquidity as airlines
across the globe struggle with collapsing
demand for travel because of the
coronavirus outbreak.
On Monday, US carrier SOUTHWEST
AIRLINES signed a US$1bn 364-day term
loan which was fully drawn down and
also fully drew down its existing US$1bn
lVE
YEARûREVOLVINGûCREDITûFACILITYûTHATûISû
set to mature in August 2022. On
Wednesday, AIR CANADA drew down on its
US$600m RCF and said it was working
with lenders to raise additional liquidity
over the next several weeks.
The Canadian airline also has a C$200m
(US$136.9m) RCF that it intends to draw
down on this week.
In addition, US cruise company CARNIVAL
DREWûDOWNû53BNûFROMûITSûlVE
YEARû2#&û
last week, while online travel booking
company EXPEDIA drew down US$1.9bn
UNDERûITSûlVE
YEARû2#&
However, bankers say that drawn
revolvers do not necessarily provide the
ideal funding mix and really only offer a
short-term solution to liquidity problems.
“Nobody knows how long this will last.
Borrowers would be better off looking for
longer-term solutions by cutting costs,
rolling back on capex programmes, debt and
rent holidays,” said one banker.
Tapping the SME funding programmes
some banks have set up and getting
government help are other options open to
companies facing problems accessing
liquidity, bankers said.
“There are things you can do to deal with
costs but you can’t create liquidity. Catching
what liquidity you can in addition to this is a
no-brainer,” said a second debt adviser. “All
our sponsor clients are already going
through their portfolios and seeing where
they can draw down on RCFs. That will
happen very soon.”
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