Financial Times Europe - 26.03.2020

20 ★ FINANCIAL TIMES Thursday 26 March 2020

Gold bugs fear that central banks will

not protect the value of plain money.

They prefer the yellow metal for this

reason. If so, this is their time.

Governments have had to borrow

heavily and spend to resuscitate their

economies. This week Goldman Sachs

encouraged its clients to buy this

golden “currency of last resort”.

A bright spot this year, gold has risen

7 per cent. Assets under management

in gold exchange traded funds have hit

record highs this month (to March 20),

in both dollars and tonnes. April

futures are priced above December

contracts, reflecting high short-term

demand. The US Federal Reserve’s

unprecedented plans to purchase an

unlimited amount of Treasury bonds

can only have added to its attraction.

Supply concerns have also driven up

gold’s value. US futures priced higher

than London spot gold prices reflect

heightened risks about travel curbs.

Shutdowns of parts of the supply chain

including mines threaten the delivery

of physical gold. Those shutdowns also

affect New York and London. The

latter is the world’s biggest physical

market for the precious metal. Those

bars need shipping to New York to

deliver against gold futures traded on

the Comex exchange. The prospect of

disruption in gold shipments between

the two cities adds a premium.

As the Fed prints more money, other

central banks will probably add to their

gold holdings, after two record years of

reserve purchases. These buyers

account for 15 per cent of purchases,

from almost nothing in 2010. China

and Russia have led the way.

Elsewhere, supply-chain woes have

pushed up food prices. Once lockdowns

end and consumption resumes while

real rates stay low, inflation should

pick up. That has been the other reason

to buy gold, as inflation protection.

Perhaps gold’s best attribute is what

it lacks, a positive correlation with

other securities prices. As such, it

Gold/state stimulus:

valuable insurance

provides some hedge against market

volatility, a bit like plain old cash

should do.

LVMH makes perfume. Chemicals by

Ineos go into car parts. Diageo distils

vodka. Now all are in the much less

glamorous — and less profitable —

business of making hand sanitiser.

The old wartime edict of

“repurposing” factories and businesses

is back with a vengeance. Government

leaders including UK prime minister

Boris Johnson have sounded the call to

arms, urging business bosses to lead a

national effort to plug gaps in medical

Hand sanitisers:

clean business

and other resources exposed by the

coronavirus pandemic. Some have

heeded these calls. Aerospace group

Meggitt and carmakers Nissan and

McLaren are working to develop

medical ventilators. As they should.

National service never looked so

good. There is limited downside — it is

not as if people are rushing to buy

perfume, cars or planes right now —

and factories are more easily retooled.

LVMH normally puts more luxurious

emollients in bottles, so it is not a huge

stretch to switch the liquid. Ineos is

unaccustomed to dealing with small

bottles but makes the key ingredients

— ethanol and isopropyl alcohol.

On the upside, here is real-time

environmental, social and governance

policy in a form understood by even

the most misanthropic: companies

doing undeniably the right thing at the

right time. Human nature means our

long-term memory is better for

corporate misdemeanours than good

deeds, but the residual goodwill helps.

With stores’ shelves cleared of hand

sanitisers, and of other key shortages,

questions of supply and demand falling

out of whack in the opposite direction

look woefully pre-emptive. UK sales of

hand sanitiser were up 255 per cent by

value year-on-year in February, market

researchers Kantar says. Overall liquid

soap prices have risen as much as 58

per cent in China.

Most of the newcomers’ supply

online is going — gratis — to workers in

Britain’s NHS and similar bodies. These

customers can tell them when to revert

to normal business. Philanthropic, yes.

But smart business too.

Activist investors get a bad press.

German bosses called them locusts.

Hillary Clinton once compared them to

hit-and-run drivers. They are blamed

now for weakening companies’ balance

sheets by making them gear up to

return cash to shareholders. That

financial engineering will make it

harder to get through the virus crisis.

A sense of proportion is needed.

Hedge funds cannot be held

responsible for a doubling of corporate

bond supply since the financial crisis.

Even so, activist funds do make a

difference. The companies they target

have a one-in-nine chance of seeing a

change to their credit ratings. That

change is twice as likely to be negative

as positive, according to S&P Global

Ratings, which analysed five years of

shareholder activist campaigns.

The most typical reason for a

downgrade was the heightened risk

that followed a debt-financed deal

encouraged by the activist shareholder.

The fashion for spin-offs also tends to

damage creditworthiness because it

reduces diversification. The

enthusiasm for “winning by spinning”

has been particularly evident in

Europe, where activist campaigns have

tripled in the past two years.

So if companies are too indebted and

insufficiently diversified to cope with

the downturn, activists take some of

the blame. But they can be forces for

good, too, for example by opposing

reckless acquisitions. Activists do not

always push for more short-term

returns. In the case of US utility Evergy,

Elliott urged them to make more

renewable energy investments instead

of buying back shares.

Shareholder activism may well have

peaked. M&A-related activity was

driven by high stock market values and

tax-driven cash repatriations. Investors

have little clout at a time when

companies are begging governments to

bail them out. Even so, there will be

opportunities. Some funds will be able

to play a positive role. Their challenge

is to show they are more than the

profiteers of the popular imagination.

Activist investors:

buyer remorse

According to corporate finance theory,
companies signal their prospects
through their financing decisions. A
company, at its peak, will sell equity
knowing its prospects will decline and
it can force that underperformance
over a larger shareholder base. A more
sanguine rival will issue debt, unwilling
to share any potential upside in the
equity with more investors. It was
therefore interesting to hear David
Calhoun, the interim Boeing CEO,
declaring that if the US government
wanted to take shares in the aerospace
group he had better rescue options.
As the US Congress moves closer to a
comprehensive bailout for workers,
small businesses and large enterprises,
it appears Mr Calhoun’s preferences
will be honoured. Of the $2tn package
on the table, about $500bn will be
allocated to large companies in the
form of corporate debt guarantees that
the Federal Reserve has said it would
be purchasing. The legislation
reportedly calls for curbs on stock
buybacks, and otherwise promises
oversight over this new capital.
But the easiest solution and best
outcome for taxpayers would be to
receive equity. Consider the
conundrum. Any debt issued, quickly
repaid after a recovery, would suggest
easy terms for those companies that
came knocking at the government’s
door. But if the debt proves too
onerous, these enterprises were far
more feeble than anticipated. They
should then have not been taking on
fixed obligations even on cheap terms.
For corporates facing liquidity or
solvency problems we will not know
for months if the emergency measures
will be enough. But clear winners have
begun to appear. Investment-grade
borrowers were stunned last week
during the bond sell-off. AAA
corporate bond spreads jumped from
about 50 basis points beyond 230bp.
But on Tuesday, the Bank of America
ICE AAA bond index suddenly dropped
back down to 184bp on news of the
pending rescue bill in Congress.
Distressed managers over this past
weekend were suddenly finding the
most interesting opportunities among
the large-cap debt issuers. These had
bonds which had indiscriminately sold
off during last week’s panic. Companies

US bailout:

the signal and the noise

saw an opportunity, too, as the likes of

Comcast, Lowes and Mastercard all

tapped the bond market. March total

investment grade issuance may break

records. When companies are raising

capital, listen to what they are saying.

CROSSWORD

No. 16,435 Set by AARDVARK

 

 

 

 



 



   

  



 



JOTTER PAD

ACROSS

1 Wearing extravagant clothes on

HP, say (12)

10 Labour defends supremo

regularly ignoring commotion (7)

11 Parisian’s ready eagerness to

polish off a biscuit (7)

12 Relatively cold island, about one

centigrade to the west (5)

13 Craft loaf to be shifted around

part of checkout (8)

15 Dash back with company car

once, after a cocktail (4,6)

16 Central element of restaurants

presented by staff? (4)

18 Restraint drops when chatting

(4)

20 Casually buy old bed, keeping

ordinary twin possibly (4,6)

22 Dina runs in 200m event perhaps

shining (8)

24 Some schoolgirls returned home

(5)

26 Jawbone hurt after summit

accident initially (7)

27 Jays moved into part of golf

course rejecting company of

flyers (7)

28 US actor’s gown oddly tried on

by Republican (6,2,4)

DOWN

2 Rendering surface of villa, taking

ages, brought about injury (7)

3 Carrier that might get jump start

by breakdown service in Falkirk’s

outskirts (8)

4 Decoy requiring switch of hands

to guide (4)

5 Time of government debates

in a flexible way? Confusion

resounded (6,4)

6 During early autumn period,

going topless is foolish (5)

7 Look fixedly over inner section of

ballet for graceful creature (7)

8 Hired messengers who become

increasingly exposed (13)

9 Rent a seaport’s blue pedalos

maybe (8,5)

14 Piece of furniture joint curator’s

opening with locks (5-5)

17 Gives a duplicate to policeman

that is attending crime (6,2)

19 Person who orders in cattle when

temperature dropped (7)

21 Scottish inventor Jack uncovered

rare lab equipment? (4,3)

23 Impromptu pop-up taken to

party once (2-3)

25 Repair marks on curtains (4)

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Solution 16,

Lex on the web

For notes on today’s breaking

stories go towww.ft.com/lex

Twitter:@FTLex

Like a panic-stricken shopper SSP is

filling its trolley with fresh financing

while it can.

As railway stations and airports

grind to a halt, sales at the travel food

retailer have dropped 80 per cent.

SSP has shelved dividends and

buybacks to save cash. Instead it has

bagged a new bank credit line and

launched an accelerated equity raise

yesterday.

Chief executive Simon Smith gets

points for the speed and scale of the

remedy. In reality he had few choices.

SSP now expects an operating loss of

as much as £200m this year, down

from that much profit last year.

The bulk of revenues comes from

the group’s operations in the UK and

Europe. Trade in airports has been

hit hardest as travel bans and flight

cancellations take effect. Revenues in

March alone could be as low as half

what they were last year.

SSP is cutting overheads and thinks

its monthly cash burn will come down

to £20m a month. It expects little

change in operating conditions for the

rest of the year.

SSP is planning for the worst. The

new funds ensure survival for at least

the next six months. No wonder its

market value leapt a fifth on the day.

SSP chose to issue new shares

equivalent to 19.99 per cent of

outstanding stock. That keeps it below

the 20 per cent threshold requiring a

prospectus, enabling fast fundraising.

Existing institutional investors and

management will both participate. On

top of £200m in new equity it has

also arranged a new bank facility of

£113m. Combined with its existing

liquidity, that should more than

cover its funding gap, currently

estimated at £250m until the end of

the calendar year.

Keeping net debt to a prudent 1.

times ebitda at the end of last year

now looks very sensible. This year’s

disruption will push up its leverage

ratio to 2.4 times by the end of March

but still within its debt covenants.

Access to government funding is

expected to be approved.

SSP’s share price had crashed for

good reason, given so much exposure

to travel. While hoarding may have

bad social connotations today, for

SSP doing so was a matter of survival.

FT graphic Sources: company; FT Research

SSP liquidity and cash requirement

m

New credit facility

New equity

















Estimated funding

requirement

until December

Leverage

Net debt as a ratio of ebitda*













    Mar 

Sources: S&P: company; Refinitiv

* Earnings before interest, taxes, depreciation, and amortisation

Share prices

Rebased











Jan  Feb   Mar  Mar 

SSP

FTSE All share

FTSE  Travel and Leisure

SSP/travel food: hunger games

A sales collapse at railway stations and airports is pushing food retailer SSP to the brink. A snap funding

round yesterday and a new credit facility should see it through the next six months. Low leverage before

the crisis helped it raise funds. Its focus on travel is reflected in SSP’s underperforming shares.

MARCH 26 2020 Section:FrontBack Time: 25/3/2020 - 18: 56 User: joe.russ Page Name: 1BACK, Part,Page,Edition: EUR, 20 , 1