Learning to dance in the rain

THE unravelling coronavirus disease 2019 (Covid-19) situation has caused significant financial distress in East Asia, and has made its presence felt in the European and American markets. Analysts are now considering the increasing possibility of a global recession in the first half of 2020.

Disruptions to business sectors comprising both supply chain shocks and demand drops are taking place on an unprecedented scale, bolstered by the increased significance played by China in the global economy relative to the 2003 severe acute respiratory syndrome (Sars) epidemic. Existing weaknesses of businesses will be exposed and accentuated by Covid-19 during this time, even if the economic backdrop slowly recovers.

A likely net effect of these disruptions would be increased disputes and litigations, paired with corporate defaults and insolvencies. It is anticipated that there will be a surge in court applications across multiple jurisdictions for bankruptcy protection. The sooner that businesses take stock of their situation amid the economic downturn, seek appropriate professional and legal advice, and take the necessary steps to protect their position and/or mitigate their losses, the better the chance that they have of surviving post-Covid-19.

There are, however, silver linings in the midst of these storm clouds.

Historical data suggests that disruptions to financial markets caused by major viral outbreaks, such as Sars in 2003 and Middle East respiratory syndrome coronavirus (Mers) in 2012, are relatively shortlived, and markets are quick to rebound within six months after the epidemic has passed. The effect of Covid-19 is also not homogenous across the whole economy, with certain business sectors, such as retail, hospitality, transport, being more impacted than other sectors which have experienced minor disruptions or even a boost, such as healthcare and online services.

Geographically, some economies are less exposed to the potential economic fallout in China. There may also be greater market confidence in businesses in countries that respond positively and demonstrate resilience in the face of Covid-19 (eg Singapore and Vietnam). Economic stimulus packages by governments may also cushion the falls in demand by consumers, including the US$1,280 handout to permanent residents in Hong Kong, and the 15 per cent property tax rebate given to commercial properties in Singapore.

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For opportunistic funds and private capital investors, the present distress caused by the pandemic may present a short-term window of investment possibilities. With business and asset valuations dropping and short-term liquidity proving tight, the cur rent period of caution may allow buyers to acquire targets which were previously out of their reach. This is especially so in respect of targets that have sound business fundamentals and are likely to suffer only a short-term impact due to the outbreak.

Any special situations transactional strategy in the midst of the Covid-19 outbreak, with its climate of defaults and insolvency, must be protected and supported with the right measure of legal inoculation. The appropriate type and dosage of bankruptcy protection (eg moratoriums in support of scheme of arrangement) should be administered to immunise the target from debilitating creditor actions and enforcements, while necessary rescue financing (with court-sanctioned super priority even) can be put in place to ease short-term liquidity, providing life support to the business and operations, and allowing the target to recover from this outbreak with its longterm valuation intact.

Despite the toll the Covid-19 outbreak has taken on economies and major industries worldwide, it is not all doom and gloom. Bright sparks and opportunities are present for those willing to brave the economic headwinds.

Ultimately, it is not about waiting for the storm to pass - it is about learning to dance in the rain.