COVID-19-ravaged Australian businesses could pose abundant restructuring opportunities – Analysis

Australia could host a plethora of restructuring and recapitalization opportunities as the coronavirus pandemic decimates whole sectors, with cashed-up investors poised to snag struggling businesses and advisory firms expected to grow restructuring teams, industry sources said.

• PE firms, debt funds, cashed-up investors to pounce on deals
• Advisory firms likely to expand restructuring teams
• Recap to thrive even amid government measures

Australia could host a plethora of restructuring and recapitalization opportunities as the coronavirus pandemic decimates whole sectors, with cashed-up investors poised to snag struggling businesses and advisory firms expected to grow restructuring teams, industry sources said.

The federal Australian government has announced temporary changes to insolvency laws in response to the COVID-19 pandemic, which are expected to come into effect shortly, and will provide temporary relief from statutory demands and liability for insolvent trading. Therefore, these changes could allow struggling and debt-laden businesses more time to seek financial help and hence may provide more opportunities for restructuring, instead of filing for bankruptcy. However, the question of valuations will emerge as a major sticking point, and the chasm between suitor and target will likely widen, they said.

Davide Bosio, state manager for Western Australia at investment and wealth management firm Shaw and Partners, said firms sitting on enormous amounts of cash like private equity (PE), “which are not dictated by laws of the share market”, will take advantage of the growing number of floundering businesses. Even cashed-up major gold miners will get in on the action, he noted.

“For those guys, this is nothing short of some of the biggest buying opportunities of a lifetime, when you consider how cheaply some of these companies are currently valued,” Bosio told Mergermarket.

Peter Gray, director at audit, accounting, tax and advisory firm Moore Stephens (WA), said there is no one size fits all answer but, in general terms, refinancing with existing financiers is the best option. A fire sale, he said, is not often the appropriate solution.

Struggling sectors

March Australian Bureau of Statistics (ABS) data shows almost 90% of domestic businesses are expected to be negatively impacted in the coming months due to the pandemic. The worst-hit sectors are hospitality, including accommodation and food services, with 78% of such businesses already reporting implications, and 96% expecting to be affected in the coming months. Travel and tourism-related players will also bear the brunt. On the other hand, industries least likely to be affected are professional, scientific, and technical services; electricity, gas and water supply; and, mining, the ABS said.

Manufacturing, wholesale trade, discretionary retail, media and telecommunications, property, business services, postal, and warehousing, are reporting massive adverse effects due to the coronavirus crisis, one corporate advisor said.

While aviation might receive a federal government bailout, particularly Australian national carrier Qantas, the proposed AUD 180bn stimulus package is geared more towards keeping people employed and small to medium-sized enterprises (SMEs) afloat, the corporate advisor added. Last week rating agency S&P Global junked Virgin Australia’s credit rating but rival agency Fitch remained more optimistic, despite an admission by the struggling airline that its liquidity ‘‘could come under pressure quicker than previously anticipated’’.

The extent of any forthcoming restructuring will depend on companies’ balance sheets and debt levels, an Australia-based restructuring advisor said. Moore Stephens’ Gray agreed, adding that any debt-laden business, regardless of industry, would be a target.

Companies with high gearing but adequate underlying operations to justify a recapitalization will be hot targets, Gray noted. Those with modest gearing, relatively stronger share price or excess cash will assess the market and identify potential targets. “There will also be opportunities in commodities if equity markets dry up, but history suggests resource companies are likely to continue to raise equity,” he added.

Typically, existing debt holders are parties in the best position to save a company, Gray noted.

Bosio added if firms are not restructured and continue to operate as a going concern, there will be a “massive kick up” in administrators being appointed and businesses going to the wall. In this case it would make sense for lenders to be flexible on debt covenants to maintain the long-term interests of businesses, he noted.

One PE source noted some businesses are breaching debt covenants and banks won’t lend further. Therefore, PEs or potential buyers with funding capacity will seek to grab these assets at discounted prices. If such suitors were to acquire now, amid unchartered global uncertainty, they may be able to drive a speedy recovery and subsequently exit the assets quicker, the PE source said, without elaborating.

Travel/tourism-related businesses and those with supply chains exposed to overseas markets and disrupted by the pandemic will most likely need restructuring and refinancing, and PE firms could jump on these opportunities, one M&A lawyer noted.

Chamber of Commerce and Industry WA Chief Economist, Director of Policy & Influence Aaron Morey said the COVID-19 crisis could have significant ramifications for the structure of global value chains.

“When the dust settles there will undoubtedly be a revaluation of the tradeoff between economies of scale and specialization that tightly integrated value chains bring, and the risk with having parts of those chains concentrated within particular geographic areas,” Morey said. In that case the global economy will be less efficient but better prepared to withstand such events in the future, he told Mergermarket.

Suitors or White Knights?

If one assumes a white knight is sought to replace existing debt, then debt funds that have recently raised equity will be well positioned to take advantage of these situations, Gray said. Peers with stronger balance sheets might be able to pick up non-core assets on the cheap but are unlikely to provide enough funding to act as white knights, he added.

Shaw and Partners’ Bosio noted cashed-up PEs could be white knights, citing KKR as a recent example of the growing trend. The global PE firm has stepped in to work on a possible solution for recapitalizing Australian online travel agent Webjet, which witnessed its market value fall from about AUD 1.8bn (USD 1.06bn) to AUD 509m owing to the COVID-19 pandemic. Today (1 April), local media reported Bain Capital is also believed to be considering a deal to recapitalize Webjet.

On 26 March, Webjet reportedly terminated an AUD 250m (USD 162.7m) equity raise plan as it was unable to secure sub-underwriters for the offering. The sub-underwriters were reluctant to take on the deal amid choppy markets owing to the firm’s significant pool of retail investors. Alternatively, Webjet is expected to seek a financial rescue package previously proposed by KKR, as reported.

Bosio added that Australian travel agency service Flight Centre had a strong business model but is also suffering a similar fate. A local media publication reported in March Flight Centre appointed Luminis Partners to help it consider options to survive the pandemic. The firm has already cancelled its interim dividend to save more than AUD 40m and its senior executives have opted a 50% pay cut, as reported. A media report today noted Macquarie and UBS are believed to be assisting Flight Centre to consider options to meet liquidity needs.

Feeding frenzy

A second corporate advisor suggested that, despite the heavy blow, some of these sectors are expected to recover once uncertainty dissolves, such as tourism. Once people have a better idea about how the pandemic will end, they will be able to decide valuations, the second corporate advisor said.

Advisory firms that specialize or deal with distressed assets are likely “salivating right now”, the first corporate advisor said, adding that this could turn into a “feeding frenzy”.

Gray noted while this won’t occur immediately, and that the more pressing need is likely to revolve around business advisory practices that focus on providing solutions to clients, rather than simply tax assistance. Bosio agreed, adding that many larger firms will also look to recruit such advisors.

For obvious reasons, however, there’s no insight into the potential value of targets, lifespan of the market turmoil or its effects on earnings, Bosio noted.

Debt-laden companies, whether they had strong business models prior to the COVID-19 outbreak or not, will be concerned about if they can suspend their debt, refinance, or convert debt to equity, he added.

This is where opportunities for advisors exists, the first corporate advisor noted.

However, the central theme to all this sits with valuation perspectives, and whether those of the targets and their suitors will eventually align, the industry sources agreed.

Regardless, Bosio noted that as the COVID-19 pandemic continues to wreak havoc and affect companies’ cash flows, there will be plenty of recapitalization opportunities.