Globally, the COVID-19 pandemic has presented a set of unique challenges to corporate and sovereign debt managers. The IMF reports that in many countries the health crisis has occasioned a marked increase in the potential for debt distress across diverse multiple deficit spending units.
This situation is being largely fuelled by key factors including the potential increase in financing requirements to contain the direct and indirect shocks provoked by the pandemic; capital markets dislocations; decline in overall demand for goods and services in affected sectors; as well as capital flow reversals in emerging and developing economies.
As debt vulnerabilities surged across governments, sectors and businesses, debt managers were without advance notice summoned to promptly re-align and adjust their debt management strategies to keep their businesses afloat in these unusual times.
In Ghana, the momentum for local bond issuances in the local debt capital markets did not slow down entirely in 2020, per data from the Central Securities Depository (CSD). The total debt securities issued in the capital markets for full year 2020 was GH¢207billion, representing a 43% increase from that of the prior year.
This performance was mainly driven by a series of bond issuances from the government, quasi-government institutions and financial institutions. Key investors including banks, pension funds, asset managers, real money accounts and High Net Worth Individuals elected to pack more money into government securities and issuances from government-related institutions as their sentiments on the real economy began to lose confidence.
Despite the global headwinds, the local debt capital markets remained poised and continued to demonstrate strong potential for growth. However, key local investors have tightened their credit risk management frameworks in response to the challenging market conditions driven by the pandemic, particularly in relation to sectors that have been hardest hit – including aviation, tourism and hospitality. This truncated appetite is expected to soften as the economic recovery becomes stronger.
In the broader financial services sector, we have observed that certain deficit spending units are mostly focused on engaging with commercial banks and non-banks to either raise additional funding or initiate restructuring of their existing loan facilities. As evidenced by recent financial results publications, the majority of banks considered new financing requests from borrowers cautiously as they kept a close eye on credit impairments and potentially looming non-performing loans (NPLs).
This restraint exercised by investors and commercial banks alike in lending to the real sector is reflective of the perceived debt vulnerabilities in the real economy. Against this development, how can deficit spending units better manage actual and potential debt vulnerabilities to access new funding from the financial sector? For debt managers in this “business-as-unusual” scenario, navigating these turbulent times would require innovative and well thought-through strategies to ensure the survival and sustainability of business operations across sectors.
In response to the question “What can business leaders do in a Covid-impacted environment to optimally manage debt vulnerabilities as they reposition their businesses for debt capital markets funding?”, I believe the following suggestions are worth considering and implementing from ‘C-Suite’ and debt management perspectives, in addition to the nifty ideas being nursed in boardrooms:
Digitise your business
To that extent, the first major step businesses can consider taking is to digitise their core and non-core operations. Across industries, the rate of digital adoption is growing, particularly in relation to making and receiving payments, and processing customer requests.
I believe there will be minimal push-back on the view that one positive outcome from the health crisis is the acceleration of digital and technological infrastructure to enhance efficiencies and spur economic growth in critical ecosystems across value chains. Business leaders are encouraged to consider the many advantages of improved technology and digitisation to further enhance their business offerings, and in some cases reduce the cost of doing business.
Initiate debt restructuring discussions early
In addition, businesses that are already seeing challenges with their debt can proactively initiate debt restructuring discussions with their investors or lenders, rather than wait for a default to crystallise or the situation to get worse. Being proactive in this way would contribute to giving lending institutions and investors a good sense of how businesses are managing their debts and how they are dealing with increasing debt vulnerabilities.
For instance, if a business has a 3-year loan facility and is required to repay the full principal in three years and foresees challenging times ahead in terms of repayments, the business can proactively approach the investors or lenders for a restructure to allow the business to negotiate potentially more favourable terms so that it can honour its obligations timeously.
More favourable terms may include tenor extension, price reduction, sculpted repayments, interest and/or principal deferment among others. As observed in the debt capital markets space, a few issuers both internationally and locally proactively approached their bond investors for deferment of interest payments.
Although this is tantamount to a technical bond default per market convention, if managed properly this strategy can secure concessions from investors and buy some breathing space for issuers in financial straits. This would enable the issuers to refocus and reposition their businesses for recovery and growth.
Consider cost optimisation strategies
The health crisis has necessitated new investments in certain sectors and aspects of businesses to ensure continuity. These investments may have competed away funds that would otherwise have been spent differently. In these times, operational costs tend to climb for certain industries – hence the need to explore more efficient and agile ways of doing business. In addition to keeping an eye on operational costs, it is also imperative to close out any revenue leakages as much as possible.
A perceived low-hanging fruit to contain cost pressures in difficult times for certain businesses is laying-off workers. However, it is always possible to explore innovative ways of doing business and maintaining staff, including moving out of expensive offices to smaller working areas and initiating working-from-home plans, if possible. Businesses can assess their peculiar needs; examine how they are uniquely structured and orchestrate more-nimble strategies to run their business more efficiently.
Seek advice from credible financial institutions
Even more fundamental, businesses should prioritise seeking professional advice and guidance from credible and qualified financial institutions to manage debt vulnerabilities, restructure and/or optimise their balance sheets, and explore viable financial alternatives to ride out the storm in such turbulent times.
The writer is the Manager Debt Capital Markets, Investment Banking Stanbic Bank
