Almost a year removed from Covid-19’s inception and infiltration into western societies, corporations have attempted to remain flexible and responsive to the altered reality and business climate presented by the pandemic. The ‘response’ to the deep declines in revenue (and simultaneous efforts to maintain liquidity and meet operational expenses), has however seen a marked and enhanced reliance on:
(i) fiscal policies and stimulus packages introduced by governments; and
(ii) large scale increased borrowing from lending institutions (with global corporate debt surging upwards of USD 5.4 trillion).
Thus it can be considered, that absent a swift and efficient return to profitability during the course of 2021, it is more than merely arguable that companies’ finances may reach a very precarious position, and consequently give substance to the claims forecasting an increase in corporate defaults and bankruptcy proceedings for 2021.
The reality is that corporations should refrain from being in a position where they address the lingering and protracted effects of Covid-19 with unsustainable temporary measures, particularly when in the current state of play, global economic recovery by even Q4 2021 is not guaranteed. The consequences of this continued over-reliance on short-term solutions may well include, inter alia:
(i) increased defaults on corporate lending;
ii) unavoidable declarations of bankruptcy and insolvency (and entry into corresponding legal proceedings);
(iii) deterioration of credit quality in secured and leveraged lending markets;
(iv) potential depreciation of already collateralised assets; and
(v) increased scrutiny and/or scepticism over questionable balance sheet manoeuvrings and/or ‘window-dressing’ exercises in financial reporting.
Incidentally, while noting the existence of renewed hope with the announcement of several vaccines, expectations on this development to expedite global recovery need to be conservatively managed, and equally not become naïve (in light of such purported progress), to the possibility of hasty policy-makers abruptly withdrawing the aforementioned stimulus packages and fiscal policies, (noting that public finances are not immune from the pandemic, and the assistance being afforded to stakeholders to weather this storm is having a continuously haemorrhaging effect which could cause significant financial instability).
Whilst weathering the storm is crucial, identifying a long-term roadmap (in the midst of Covid-19) to be ready to return to profitability (and discharge all accrued liabilities) is equally paramount. It is reassuring (as more favourable saving graces), to see that increases in capital restructure projects (by way of re-negotiations, amendments and extensions of existing lending and financing facilities), together with corporate restructurings are also being forecasted in 2021. In light of the foregoing, key strategic long-term planning mitigating the pitfalls of the over-reliance on the unsustainable short-term ‘life-boats’ cannot be overstated. Gibraltar, along with its access to the UK market (and future post-Brexit Schengen opportunities), remains a fully-compliant and common-law jurisdiction of choice which offers a plethora of efficient finance, restructuring and legal project management options to assist corporations, lenders, borrowers and decision-makers in identifying optimum solutions with greater sustainability in the medium to long-term, as we hopefully edge closer to the beginning of the end of Covid-19.
Even borrowers that eventually are profitable may find themselves over-levered after the pandemic and struggle to service their debt