18 ★ FINANCIAL TIMES Thursday9 April 2020
Travelling regulates the imagination
with reality, noted Samuel Johnson.
Germany’s Tui could use less of the
latter these days. The world’s largest
tour operator facedfinancial ruin as
holidaymakers disappeared into their
homes after coronavirus travel curbs.
Yesterday Tui signed a €1.8bn
package of state-funded bridge loans
(until June 2021) to tide it over. Unlike
its erstwhile rival Thomas Cook, and
cruise liner Carnival, Tui has rightly
received favourable treatment.
To start, Tui had a decent business.
Until September last year, Tui had a
relatively clean balance sheet — net
debt roughly in line with its ebitda.
More important, it had no working
capital problems. It could pay its
suppliers (hotels etc) confident that
customer holiday deposits would
follow. Cash conversion, in terms of
days, had quickened since 2015.
However, the looming customer
refunds would have coincided with
cancellation payments to Tui’s own
suppliers. It needed help, pronto.
Look beyond today’s grim reality and
the sun could still shine on Tui. The
collapse of the less well run Thomas
Cook removed a large competitor. Tui
has some assets, which could be sold if
necessary. As of September, its cruise
ships were on its books at more than
€1.25bn. Roughly half were sold in
February, admittedly to its joint
venture with Royal Caribbean. Tui also
owns hotels worth more than €1.6bn.
A revolving credit facility costing 150
to 200 basis points above a near zero
Euribor rate is a lot cheaper than the
11.5 per cent Carnival offered to attract
bond investors. It too had plenty of
hard assets on its balance sheet.
What it lacked was goodwill with any
government. Unlike Tui, its employees
tend to come from wherever labour is
cheapest.
And Tui pays taxes. Carnival’s
effective rate in the three years to
2019 was about 2 per cent. As anTui/travel:
a relief boatinvestment, Tui as yet offers no beach
party. However, with the state behind
it, it should survive.Japan has gone into partial lockdown,
meaning instant noodles are in
demand like never before. Japan’s
60,000 “combinis” — convenience
stores such as 7-Eleven — are one of the
businesses considered essential and
will be allowed to stay open, giving a
much-needed boost to sales.
Before the outbreak, the outlook had
been cloudy for these chains, viewed as
a declining industry in a deflationary
economy. Franchisees fighting againstJapan convenience
stores: lockdown lifeline24-7 opening hours and labour
shortages added to the gloom. The
number of unprofitable stores climbed
and revenue growth fell amid intense
competition between the three biggest
store operators — 7-Eleven, Lawson
and FamilyMart — which have almost
90 per cent of the market.
Panic buying in February as
infections rose pushed overall sales up
more than 3 per cent, a notable feat in
the saturated sector. It was led by a
surge in sales of processed food. Other
combini staples — masks and toilet
paper — drew more footfall. The
number of shoppers increased for the
first time in five months.
Shares of the trio have outperformed
the broader market, with FamilyMart’s
up 32 per cent from a March low. Yet
they still trade at 18 times forwardearnings, less than a fifth of the levels
they hit two years ago. Overwhelmed
supermarkets offer room for upside in
sales and share prices.
Moreover, structural forces arein
their favour. Japan’s elderly customers
— almost 30 per cent of the population
is over 65 — prefer shopping inphysical
stores. Ecommerce is a fraction that of
regional peers, accounting for just
7 per cent of total retail sales; it is about
a fifth in the UK and more than a third
in China. Buying groceries online is an
even less familiar concept, accounting
for less than 3 per cent of the food
market — and that is not likely to
change soon.
The outbreak may provide a chance
for combinis, and their investors, to
return topreviousglory days, at least
for the next couple of quarters.What is more important? Food, shelter
or transport? The question is facing
millions of Americans who have
suddenly found themselves without
jobs as April bills roll in. Their
decision on what to prioritise will
have ramifications for the $1.3tn
US car loan market.
The sector came through the
2008-09 financial crisis in relatively
good shape. It managed to avoid the
wave of defaults that engulfed the
housing sector. There is some logic to
that. You can always move in with
relatives or live in a rental if your
house is foreclosed. But in much of
America, you still need a car to get to
work — or find work.
The current crisis is different. Not
only are people out of work but a
government-imposed lockdown means
they are forced to stay at home.
Making a payment on your car takes
on less importance when you cannot
use it. Another difference between now
and 2008 is size: borrowings tied to
cars have swelled by 60 per cent since
the financial crisis. More Americans
have car loans than mortgages.
Even before the outbreak, concerns
had been growing about the sector.
Seriously delinquent auto loans now
account for nearly 5 per cent of total
outstanding loans, according to data
from the Federal Reserve Bank of New
York. That is the highest rate since
2011.
Rising default risks have put shares
of companies with high exposure to
the auto loan market on notice. Credit
Acceptance Corp and Santander
Consumer USA (a subsidiary of
Madrid-based Banco Santander) are
down more than a third for the year to
date. Ally Financial has shed nearly
half of its value. Meanwhile rating
agency Fitch put the auto finance
sector on negative outlook last month.
Some lenders are already offering
forbearance to borrowers, which
should help keep a lid on delinquency
rates. But, if the economy is slow to
recover from the pandemic, prepare
for carmaggedon.US auto loans:
trouble brewingThe argument for and against
European debt mutualisation
continues to loop round and round
with no workable solution in sight. The
eurozone crisis prompted calls for
eurobonds. The refugee crisis led to the
suggestion of refugee bonds. Now the
coronavirus pandemic has raised the
idea of coronabonds.
On one side: Italy, Greece, Spain,
Portugal, Ireland, Belgium, France,
Slovenia and Luxembourg support the
idea. Germany, Austria, Finland and
the Netherlands reject it. Countries
with high borrowing costs are the most
passionate supporters of joint bond
issuance, arguing that it is the final
piece of financial integration needed to
create a real union. More financially
secure countries tend to oppose it.
Coronabonds could help countries
hit hardest by the pandemic to access
cheaper funding. As the crisis goes on,
the gap between German and Italian
bonds is rising. Yesterday the spread
reached 213 basis points. A 10-year
bond issued at a midpoint between
German and Italian bonds would have
a yield of 0.15 per cent, a far lower rate
than Italy will find elsewhere.
Caveats might be added; for example
ensuring that money raised does not
tip any individual country’s deficit
above a certain point. Or a requirement
that collective debt is senior to an
individual country’s sovereign bonds.
Both come with their own problems.
Creating newly senior bonds would
likely raise yields for a country’s other
sovereign bonds. Deficit limits tend to
be broken in a crisis. Right now,
government growth projections are
being torn up as economies are
paralysed by lockdowns.
The European Stability Mechanism,
created to help countries struggling to
issue sovereign bonds during the
eurozone crisis, already issues bonds. A
form of pan-European debt already
exists. But accessing the financing
comes with conditions.
Italy is not yet shut out of markets.
Yields on 10-year bonds are far from
the 7 per cent they reached during the
debt crisis in 2011. The ECB has already
made record asset purchases in an
attempt to keep credit cheap.
Until Italy is blocked from borrowing
in credit markets, the idea of a pan-
Coronabonds:
no-go zone
European bond will remain just that —
an idea.
If the eurozone crisis did not result in
debt mutualisation, there is little
reason to think that the coronavirus
pandemic will.CROSSWORD
No. 16,447 Set by NEO
JOTTER PAD
ACROSS
1 Horse at post – will Derby rest
on it? (6)
5 Bearing north-east to save
British soldiers – so paras? (8)
9 Spirited Russian fellow among
solvers in Paris? (8)
10 One hug might be all you
need (6)
11 Husband in car for example
reversed to fill tank (6)
12 Worried about party after NEC
story (8)
14 Scientific mail that came for
editing (12)
18 Courted lover? (2-10)
22 Apathetic Liberal member
touring posh gardens (8)
25 Ambassador trapped in
Conservative speculation (6)
26 Small or favourite thing
maiden missed (6)
27 Unstable new currency
financiers mostly backed (8)
28 Insect dropped into food from
the east – do nothing (8)
29 Cure person dead to the world
(6)
DOWN
2 Disembark in flames (6)
3 Schedule for lightweight –
yours truly! (9)
4 Depart with poetess on travels
in March (5,4)
5 Some witches’ deaths here in
question (2,5)6 Former Kent player always up
to conserve energy (5)
7 Egg-shaped ball Roman poet
catches (5)
8 Shot prior to retirement? (8)
13 Copper to start with tasty
prune (3)
15 Wondering where young man
should go in a brawl? (9)
16 Expecting trouble, he is put on
manoeuvres (2,3,4)
17 Greek character in short time
creates shrine (8)
19 Thus wife finds pig (3)
20 Candidate turning on
explosive energy (7)
21 Rowing teams said to move
smoothly (6)
23 Noise from cat non-starter for
Dallas clan (5)
24 Venue in Edgware named (5)( / 3 $ 0 / 2
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< 1 ( 6 / 6 6Solution 16,Lex on the web
For notes on today’s breaking
stories go towww.ft.com/lexTwitter: @FTLex
Selfish in a crisis. That is what the
affluent are. They panic-buy food,
hinted Dave Lewis. If this was a moral
judgment, it was unwise. Tesco’s chief
is himself getting a good dunking in
the duck pond of public opinion.
The UK supermarket chain is
paying a £635m final dividend. Many
groups have suspended or cancelled
payouts. Amid the pandemic, that
seems more patriotic.
Tesco, a model corporate citizen in
its broader response to coronavirus,
has proved tin-eared. It will get
£585m in rates relief thanks to a
government scheme intended to help
businesses survive. This is in no
doubt for grocers, especially with
antitrust regulations suspended.
But scrapping payouts should notbecome a loyalty test. If it does, a
damaged economy will sustain even
worse injuries.
For individual businesses, there is
merit in avoiding a public savaging.
Consider purveyors of non-life
insurance such as RSA, Aviva and
Direct Line, nudged into withholding
2019 final dividends. Inevitably, and
unpopularly, they will turn down some
claims that customers insist were
triggered by the pandemic. If the latter
worsens, big capital buffers may be
needed. Otherwise, the cash can
bolster final payouts for 2020.
But if all UK businesses stop paying
dividends, the impact would be
dreadful. Even if annual payouts are
only halved — we are well on the way to
that — it would represent a hit of about£50bn. Pension funds would become
even more stretched. Asset managers
would be even more reluctant to back
refinancings of struggling businesses.
Perhaps this is why Legal &
General and Standard Life Aberdeen
seem intent on paying final dividends
for 2019. Neither of them pick a tie or
blouse each morning without
approval from their regulators,
either. The watchdogs presumably
want savings groups to signal they are
open for business, putting money to
work in the economy.
For some companies, paying
dividends is a socially responsible
act. The angry mob should
remember that the next time they
are strapping a hapless chief
executive into their ducking stool.FT graphic Sources: S&P; Link; companies; FT research; RefinitivPayers and delayers*
Estimated UK dividend payouts ( m) Expected to go aheadLegal & General
Tesco
Standard Life AberdeenHSBC
Lloyds
Barclays
RBS
Aviva
Standard Chartered
RSA* Mostly final dividends for Suspended/cancelledThe zeal for yield
Dividend yield on FTSE index () Special RegularUK dividends
bn (full-year basis) **** Pre Covid- estimateTesco/UK dividends: welcome to the witch trials
In the UK, dividend suspensions are increasingly seen as a gesture of solidarity; banks and some insurers
have been nudged into them by regulators. Other businesses are withholding payouts for financial or
reputational reasons. But a wholesale suspension would deliver a painful blow to the UK economy.APRIL 9 2020 Section:FrontBack Time: 8/4/2020- 18:49 User:joe.russ Page Name:1BACK, Part,Page,Edition:EUR, 18, 1