KordaMentha – TMA Australia COVID-19 Survey

May 2020 KordaMentha – TMA Australia COVID-19 Survey 2020

Introduction

The KordaMentha – TMA The scale and speed of the economic impact of COVID-19 is unprecedented, and although the health- Profile of respondents COVID-19 Survey provides related outlook is becoming clearer, there is great uncertainty on how and when economies will recover. Other an insight into the current KordaMentha, in conjunction with the Turnaround Board or Lender/Debt trader economic situation and Management Association of Australia, surveyed the Management Australian turnaround community for their insights on Equity holder/ 12% 11% Lawyer Distressed outlook for Australian the impact of, and response to, COVID-19. investor/Private 4% 17% equity investor These summary results cover the following topics: 8% 316 businesses as a result of respondents • Australia’s current turnaround environment. 12% 12% Corporate Turnaround COVID-19. adviser service provider • The Government and legislative response to 24% COVID-19 in Australia. Insolvency professional • The short-term outlook for Australian businesses. Note: not all respondents answered all survey questions. The • The longer-term outlook as the Australian economy results presented in this report are the percentage of respondents positions for recovery. who answered the question, not total survey respondents.

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Key insights

01 02 03 04 05 Whilst the outlook for Most respondents 58% of respondents 25% of respondents 63% of respondents some industries is clear, believe the governments believe Australia’s believe businesses are see the availability of the outlook for others (Commonwealth and economic recovery will not adequately prepared external debt or equity is mixed. For example, State) have done be U-shaped, with only to ramp up once social financing for recovering approximately one enough to support 10% believing it will be distancing restrictions businesses being worse third of respondents Australian businesses in V-shaped. are lifted. over the next 12 months. expect the ‘Agriculture response to COVID-19, and food’ sector to be and that Australia’s negatively impacted current turnaround and over the next 12 months, insolvency legislative but one third expect it to regime is sufficient to be positively impacted. deal with COVID-19’s For the ‘Media and economic impacts. telecommunications’ sector, half expect a negative impact, but one third expect a positive impact.

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Turnaround environment

Industry outlook Demand for turnaround related services Respondents’ expected level of COVID-19 Respondents’ change in level of enquiries over economic impacts over the next 12 months the past month

None Hospitality Deterioration Tourism

Retail and consumer services 14% 27% Real estate/landlords Education Media and telecommunications 37% Manufacturing 22% Some increase Professional services Significant increase Construction Transport and logistics Health and related services There is a sense of ‘calm before the storm’ for the turnaround Energy and utilities industry, with 59% of respondents experiencing an increase in Mining and resources enquiries over the past month. However, 27% have experienced a Agriculture/food deterioration in the level of enquiries. 0% 20% 40% 60% 80% 100% Significant negative Moderate negative No impact Positive

Unsurprisingly, respondents expect the ‘Hospitality’, ‘Tourism’ and ‘Retail and consumer services’ sectors to face the greatest negative impact, and the ‘Health and related services’ sector to experience the greatest positive impact. Interestingly, sentiment for various sectors was very mixed. For example, 31% expected the ‘Agriculture/ food’ sector to experience either a significant or moderate negative impact, whilst 35% expected that sector to experience a positive impact. For the ‘Media and telecommunications’ sector, 48% expected that sector to experience either a significant or moderate negative impact, whilst 32% expected that sector to experience a positive impact. This highlights the uncertain outlook for many industries.

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Government and legislative response

Government response Legislative response

Have governments (Commonwealth and State) Will further government support and stimulus Is Australia’s current turnaround and Will the six month relaxation of Australia’s ‘trading done enough to support Australian businesses (e.g. additional JobKeeper payments) be insolvency regime sufficient to deal with while insolvent’ laws reduce the number of corporate in response to COVID-19? required? COVID-19 economic impacts? insolvencies likely to occur over the next 12 months?

13%

35% 46% 45%

54% 55% 65%

87%

Yes No Yes No

Respondents’ suggestions for further government support and stimulus included: Respondents’ suggestions for changes to Australia’s current turnaround and insolvency legislative regime included: • support for early commencement of infrastructure projects • extension of Fair Entitlement Guarantee to Voluntary Administrations for a • tax breaks and tax incentives defined period • social security payment increases and extensions • reconsideration of Safe Harbour regime applicability for small to medium businesses • low rate loans to assist business’ working capital needs • introduction of US-style Chapter 11 restructures • targeted support for specific industries (e.g. tourism) • extension of the relaxation of the ‘trading while insolvent’ rules • extension of JobKeeper payments. • consideration of UK-style pre-pack insolvency practices.

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Short term outlook

Survival

For how long can each industry continue on care and maintenance without either Importance of factors to businesses for surviving the next 3-6 months further government support and/or a return to business as usual?

Hospitality Customer patronage 89% 11% Tourism

Retail and consumer services Working capital 81% 19% Education access Real estate/landlords Functioning supply 72% 28% Health and related services chains Manufacturing Media and telecommunications Government support 70% 30% Transport and logistics

Construction Rent holiday 62% 38% Energy and utilities Agriculture/food Debt interest/principal 61% 39% holiday Mining and resources Professional services 0% 20% 40% 60% 80% 100%

<1 month <1-3 months 3-6 months >6 months Significant Moderate

Given recent commentary around the likely near-term lifting of restrictions that have been imposed by governments, it appears that respondents expect that many industries will be able to survive until those restrictions are lifted. However, given that a complete return to business as usual may not be immediately achievable for some sectors, further targeted government assistance may be required.

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Short term outlook

Short term actions and changes

Operational changes introduced Actions taken by respondents or their Other actions and changes taken by respondents and by respondents and their clients clients to survive the next 3-6 months their clients include:

Utilising video Reducing and/or pausing discretional and operational 88% Stopping recruitment 62% conference technology expenses (client functions, staff training).

All staff currently Stopping investment/ 80% 50% working from home capex Reducing pay and working hours. Forcing staff to take Ceasing face to face 46% 76% leave meetings with clients Seeking covenant relief. Utilising electronic Reducing headcount 37% 67% signing of documents Seeking additional Seeking cheaper leases. 31% Rotating staff through debt 28% office Stopping orders from 28% suppliers Changing dividend policy. Introduction of use of 11% PPE for staff Seeking additional 25% equity Requiring upfront retainer payment from clients.

There have clearly been radical changes undertaken by Perhaps surprisingly, the majority of respondents and respondents and their clients in response to COVID-19 their clients have not taken actions to reduce some and the imposed restrictions, largely relating to major costs (e.g. reducing headcount, stopping orders increasing digital ways of working. from suppliers), and only half had stopped investment/ capex. Interestingly, slightly more respondents and their clients had sought additional debt, as compared to seeking additional equity. This highlights the current low cost of debt funding, as well as the potential reluctance of shareholders to contribute additional funds.

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Positioning for recovery

Recovery profile It is clear that respondents do not expect the Australian Expected shape of Australia’s Expectations of how difficult it will be for Expectations of businesses’ level of economy to bounce back rapidly. The overall poor economic recovery companies to restart with adequate working preparedness to ramp up once social economic recovery outlook (predominantly U-shaped), capital and/or access to necessary supply chains distancing and other restrictions are lifted will likely be compounded by the lack of preparedness V Very of businesses to take advantage of any improvement Straightforward Not prepared 3% prepared in conditions, and the lack of financing availability Very 10% difficult 15% to support working capital and other recovery 25% requirements.

W 40%

57% 58% 32%

U Somewhat 60% difficult Somewhat prepared

Recovery financing This negative outlook for debt and equity financing Availability of external debt or equity How active do respondents see the following sources of external from traditional sources is at odds with recent financing financing for recovering businesses over financing for turnarounds over the next 12 months? the next 12 months activity in Australia, particularly in equity raisings. Whilst Full debt re-financing/ Same there have been some large capital raisings by ASX- recapitalisation from new lenders listed businesses, this may not translate to the broader economy and the availability of debt finance. 18% Equity injections The positive outlook for ‘Hedge funds/private equity/ New debt from existing lenders special situations funds’ as a source of external financing 19% Better 63% Mezzanine or subordinated debt is unsurprising given the expectation for significant distress across the economy. Worse Hedge funds/private equity/ special situations funds 0% 20% 40% 60% 80% 100%

Worse Same Better

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Positioning for recovery

Recovery actions

Other suggested steps that businesses can take to position for recovery

Importance of initiatives as businesses position for recovery Moderate Significant Being proactive and engaging relevant stakeholders early.

Cost reduction – overheads Cost reduction – direct costs Obtaining additional financing. Inventory management Leveraging the shut-down period to plan/undertake necessary changes in Change management and operational transformation preparation for the post-COVID environment. Divestment or closure of business unit Revenue growth – existing products and/or markets Reducing costs, rather than chasing revenue. Cultural and governance change Revenue growth – new products and/or markets Focusing on core business.

Importance of factors to businesses for surviving the next 12 months Ongoing communication and engagement with staff and customers.

Customer patronage 95% 5%

Working capital access 88% 12% Respondents clearly expect that cost management will be more important than revenue growth to businesses as they prepare for recovery. Functioning supply chains 82% 18% By identifying ‘Change management and operational transformation’ as an important Government support 60% 40% initiative for recovery, respondents appear to be acknowledging that many businesses will need to have radically different business models following COVID-19, and that Debt interest/ 59% 41% traditional methods of incremental change and improvement may not be sufficient. principal holiday Rent holiday 55% 45%

Significant Moderate

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Positioning for recovery

Outlook

Percentage of respondents who believe the Changes implemented during COVID-19 that Other suggested changes that may be retained post-crisis: following industries will have permanently will be retained post-crisis different business models following COVID-19 Continuation of social distancing in work Retail and consumer services 93% environments. Hospitality 73% % % Tourism 71% 93 76 Education 59% Increased utilisation of Greater reliance Decrease in business travel. Health and related services 44% working from home and on diversified and Professional services 44% video conferencing domestic supply chains Real estate/landlords 41% Increased focus on liquidity. Media and telecommunications 33% Manufacturing 25% % % Transport and logistics 19% 68 50 Agriculture/food 9% Increased use of geographically diversified Focus on domestic, Sustained consumer workforce. Energy and utilities 3% rather than preference for home Construction 3% overseas, tourism entertainment, shopping, health and fitness etc. Mining and resources 2%

Australia’s post-COVID-19 economic landscape will look different to that of before the pandemic. However, the scale of change will significantly differ by industry. Some changes will be forced, others will likely be opportunistic. There is no doubt that much of the economy will require significant turnaround and transformation to survive, adapt, and take advantage of, this ‘new normal’.

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For specific questions or feedback in relation to the survey, please contact Chris Martin or Sam Bishop. Contacts

Melbourne Sydney Brisbane Rialto South Tower Chifley Tower Level 14 Level 31, 525 Collins Street Level 5, 2 Chifley Square 12 Creek Street Melbourne VIC 3000 Sydney NSW 2000 Brisbane QLD 4000 Tel: +61 3 8623 3333 Tel: +61 2 8257 3000 Tel: +61 7 3338 0222 Chris Martin Sam Bishop [email protected] [email protected] [email protected] Partner Associate Director [email protected] [email protected] +61 3 8623 3425 +61 3 8623 3465 Townsville Gold Coast Perth Level 6 S225 Oracle South Level 10 We are an advisory and 75 Denham Street Level 2, 17 Elizabeth Avenue 40 St Georges Terrace Townsville QLD 4810 Broadbeach QLD 4218 Perth WA 6000 investment firm that helps Tel: +61 7 4724 9888 Tel: +61 7 3338 0230 Tel: +61 8 9220 9333 clients to grow, protect and [email protected] [email protected] [email protected] recover value. Singapore Jakarta New Zealand We have a team of almost 400 specialists 16 Collyer Quay Level 18 Level 21 across Asia-Pacific with diverse backgrounds – #30-01 World Trade Centre II Lumley Centre Singapore 049318 Jalan Jend. 88 Shortland Street in finance and real estate through to agriculture, Sudirman Kav 29-31 Auckland Central 1010, New Zealand law enforcement and the c-suite. Specialists who Tel: +65 6593 9333 Jakarta 12920 Indonesia Tel: +64 9 307 7865 work together to solve the complex challenges [email protected] Tel: +62 21 3972 7000 [email protected] facing corporations, financiers, lawyers, private [email protected] investors and government. Since 2002, our experts in forensics, real estate, consulting and restructuring have been entrusted with the region’s most sensitive commercial matters. On each occasion, they have responded This publication, and the information contained therein, is prepared by KordaMentha Partners and staff. It is of a general with a bold, impactful solution that delivered the nature and is not intended to address the circumstances of any particular individual or entity. It does not constitute advice, best possible result for all stakeholders. legal or otherwise, and should not be relied on as such. Professional advice should be sought prior to actions being taken on any of the information. The authors note that much of the material presented was originally prepared by others and this publication provides a summary of that material and the personal opinions of the authors. kordamentha.com Limited liability under a scheme approved under Professional Standards Legislation.

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