Coronavirus - Once is enough
10 June 2020
The OECD has published a report on the global economic outlook that shows the global economy could contract by 6% over the year, and the downside could be greater if a second Covid-19 wave emerges. The race to reopen will need to be carefully balance against this risk. Growth will depend on many factors, including how Covid-19 evolves, its impact on activity, and the implementation of fiscal and monetary policy support. So far the government has said it will ‘do whatever it takes’ but will be mindful of the debt building up.
• Brazil restores coronavirus data after court ruling
• The global economy will contract by 6% in 2020, OECD
• Tokyo Olympics will be ‘simplified’ according to IOC
• Japan approves an emergency budget worth more than £230bn
• International Personal Finance – ‘is publishing the following information to update investors on key operational performance metrics for April and May 2020.
Our guiding principles continue to be to protect our people, our customers and the business.
Our return to office strategy is underway as lockdowns in Europe and Mexico ease. We are focussed on ensuring our teams are able to serve our customers and work in a ‘new normal’ environment safely, effectively and with confidence.
We maintained tighter credit settings in the period to protect credit quality and manage cash flow and, as forecast, restricted group credit issued to 30% of our original 2020 budget during April and May. In the near term, our focus for new lending will continue to be on our loyal customers who have strong credit quality characteristics. We expect volumes to increase moderately in June as lockdown restrictions are eased and our collections performance continues to improve.
Group collections effectiveness improved to 80% of pre-Covid levels in May (April 2020: 76%), driven largely by European home credit where there was an increase in the proportion of agents visiting customers and alternative repayment options were implemented. We expect collections effectiveness to improve progressively in the coming months due to the easing of lockdown restrictions in most of our markets.
Improving collections, good cost reduction and effective management of sales volumes resulted in robust net cash flow generation in May of £43m (April 2020: £41m before £21m Eurobond coupon payment).
Cash and headroom on undrawn debt facilities was £223m at 31 May 2020.
The following maturing bonds have been repaid since our last trading update:
• £44m 6.125% bonds due 8 May 2020
• PLN 200m (approx. £40m) due 3 June 2020
The group is focussing on the need to refinance its €406m Eurobond, which matures April 2021. As part of ordinary course liability management exercises, IPF has made, and may in the future make, on-market purchases of its outstanding bonds.
During May, Moody’s reaffirmed the group’s credit rating at Ba3 (stable outlook) including the ratings of bonds issued under the group’s Euro Medium Term Note Programme’.
• Paragon Banking Group# – ‘The group’s financial performance in the half year has been dominated by the impact of Covid-19, which began to significantly impact the UK economy in March 2020. All financial statistics and KPIs include the full impacts of adjustments made in response to Covid-19, which increased impairment charges by £24.0m to £30.0m (increasing cost of risk by 39 basis points) and reduced income recognised on purchased loan portfolios by £3.7m. After these charges the group’s underlying profit before tax reduced from £79.8m in the first half of 2019 to £57.2m for the current period.
New lending for the half year across all business lines was generally in line with expectations, despite economic and political uncertainty depressing volumes in the early months but with markets improving through the early part of 2020. The impact of Covid-19 caused a tailing-off of completions in the second half of March as demand fell and practical difficulties in completing transactions became more severe.
Advances in the Mortgages division reflect the tighter focus on the group’s specialist buy-to-let proposition over recent periods, increasing market share with professional landlords and reducing exposure to the lower-priced amateur landlord sector. Commercial Lending advances were driven by the increasing maturity of the group’s development finance operation and continued progress in the SME lending and structured lending businesses.
The mortgage portfolio was also supported by reduced annual redemption rates, falling from 8.7% to 7.8% as the impact of retention activity with customers and longer fixed rate periods kept mortgages in the portfolio for longer, resulting in a 3.2% increase in the net mortgage book between September 2019 and March 2020.
Prospects for future lending are hard to predict with any certainty against an economic landscape dominated by Covid-19. Although lockdown easing has commenced, customer loan demand will initially be weak, reflecting the levels of constraints still imposed on businesses and consumers. However, the group has:
• maintained all products and services throughout the crisis
• strong capital and liquidity to support balance sheet growth
• resumed appropriately socially-distanced on-site valuations from late May
• received authorisation to offer loans under the CBILS and BBLS schemes
When the economy emerges from the current crisis, the need for specialist lenders such as the group, will be greater than ever. The ability to deliver bespoke products and services to people and businesses, utilising operational agility and excellence in approaches to technology, will be crucial in meeting customers’ complex and changing needs.
Covid-19 portfolio impacts - The rapid escalation of the impact of Covid-19 on the UK economy, consumers and businesses has resulted in changes to customer demand and behaviours. The outlook for the UK economy has also experienced a seismic shift since mid-March, which has resulted in the group reassessing the macro-economic forecasts that generally drive its impairment modelling, while carefully considering emerging customer behaviour, such as the take-up of Covid-19 payment reliefs, to determine whether any such evidence suggests a requirement for additional provision.
This exercise is far more subjective than a normal period-end provisioning exercise, with much independent economic forecasting and commentary overtaken by events and little time since the onset of the crisis for reliable indicators of behaviour to emerge. However, the group considers that the additional analysis provides as reliable a basis for the determination of expected losses as is possible in the circumstances.
In order to mitigate the short-term impact of Covid-19 on its customers the group has introduced payment relief schemes across its portfolios. In the first and second mortgage books payment holidays have been offered, in line with UK government and FCA guidance. In Commercial Lending operations a variety of different reliefs have been used to ensure each customer receives an appropriate outcome. At 31 May 2020 17.8% of accounts in the Mortgages division, 22.1% of Commercial Lending accounts and 2.9% of Idem Capital accounts, all by number, had been granted some form of relief.
The greatest use of reliefs has been within the SME lending business. However, only 16% of reliefs in this area are full payment holidays, with the remainder typically in the form of interest only payment periods. Around 90% of SME lending cases with reliefs are asset-leasing cases, where the group has security on the underlying asset.
The key macro-economic drivers forming inputs into the group’s calculation of expected credit losses (‘ECLs’) are UK output (GDP), unemployment rates and house price levels. Four separate Covid-19 scenarios, reflecting the variety of currently held opinions have been modelled in detail for use in the group’s ECL modelling. The annual averages of the key assumptions in the base and most severe scenarios for each of the next two years are shown below and benchmarked against the scenario used in the Bank of England desktop stress test (published on 7 May 2020)’.
Food, Drinks & Household
• Eco Animal Health# – ‘To date, we are able to announce that the impact of COVID-19 on the group has been limited. The group’s transition to effective home working has been smooth. All staff have been retained and ECO has not required assistance from any UK or US Government financial support schemes. The group has an effective outsourced manufacturing model and the supply chain has, in most locations, adopted team shift working patterns to minimise personnel interactions. Additionally, ECO reaches its end customers through a number of stocking distributors. End users have adapted farm practices to protect workers and the industry appears to have continued in production albeit with some reduced capacity.
Despite the limited impact of Covid-19 to date we recognize that there is considerable uncertainty in the economic impact in the next 12 months; accordingly, we have taken steps to conserve cash. One of these steps is that the Board anticipates that it will not recommend the payment of a dividend for the year ended 31 March 2020. Despite these cash preservation measures the group has and will continue to invest in its core R&D pipeline as a key driver for future growth. This investment is, however, at a reduced level during the first six months of the current financial year’.
• Photo-Me International – ‘As previously announced, the Covid-19 pandemic has severely impacted all the group’s end markets, and the majority of expected group revenue in March and April did not materialise. Trading has also been weaker in Asia (especially China) since the second part of January to date.
Consequently, the group’s overall trading performance for the four months ended 30 April 2020 was significantly affected. Total group revenue is now expected to be 5.5% lower than in the previous 12 months to 30 April 2019. Profit before tax before deduction of the provisions detailed below is expected to be approximately £28m, compared with £42.6m for the 12 months to 30 April 2019, with a similar reduction in operating cash flows.
The Board has acted (and continues to act) to mitigate the impact of the current environment on the business and to preserve cash. Steps taken to date include reducing capital expenditure, utilising governmental support schemes available to the group, such as furloughing employees through job retention schemes, deferring repayment of loans and withdrawal of the interim dividend payment to shareholders. All members of the Board will take a voluntary 20% reduction in salary, from 1 July 2020 to at least the end of December 2020, and bonus payments for all management are being reviewed.
Nevertheless, the group has decided to include provisions of £14m to £18m, which mainly relates to impairment of goodwill and write down of the carrying value of non-profitable machines due to the disruption caused by the unprecedented Covid-19 situation. This also includes a provision for the anticipated cost of a major reorganisation of Photo-Me’s UK business which has experienced a significant loss in identification revenue, due to reduced consumer activity. The government’s policy to accept photos taken at home for passport identification, has taken a significant part of Photo-Me’s market share for ID photos. In response to this and the challenging Covid-19 trading environment, the group plans to restructure its UK operations. The group also plans to restructure its operations in China and South Korea. In addition, there are provisions for receivables from customer defection, and installation of security tools in the photobooths.
Profit before tax for the 12 months ended 30 April 2020 (including the provision of £14m to £18m) is now expected to be in the range of £10m to £14m.
Update on funding and liquidity - As at 30 April 2020, the group had gross cash of £66.5m, drawn debt facilities of £58.5m (to be repaid by April 2025), resulting in a net cash balance of £8m.
Since the end of April 2020, the group has obtained additional debt funding to ensure that it has sufficient liquidity during this uncertain period. A €30m loan was secured with three French banks participating under the French government-backed “PGE” scheme. The group has the right to make the loan repayment after one and within five years without penalty.
The group continues to comply with all its banking covenants.
With this additional funding in place, the Board believes that the group has the financial resources to ensure it has sufficient liquidity available and anticipates it will continue to operate within its banking covenants, subject to a modest improvement in trading conditions over the coming months.
Looking forward - As previously announced on 27 March 2020, the Board has withdrawn current market guidance until more clarity is known around the outlook of the business becomes clearer.
Since the period end, total group revenue has remained at the lower levels seen in March and April. The ongoing governmental travel bans and restrictions on the movement of people continue to reduce demand significantly for photo ID via photobooths as well as the use of children’s rides, which together account for approximately 63% of group revenue. The Board is reasonably confident that as lockdown restrictions are eased, consumer demand will return; however, it is likely it will take time to recover to pre-Covid-19 levels. The group continues to diversity its operations through its Laundry and KIS Food business areas.
The Board continues to closely monitor the Covid-19 situation as lockdown measures are eased and will review its options and take further action where possible to restructure the business and align operations to the current market conditions and consumer activity levels’.
Restaurant Group – ‘Launch of ‘CVA’ for the Leisure estate. The CVA will relate to the statutory entity ‘The Restaurant Group (UK) Limited’ (‘TRG UK Ltd’) which principally comprises the Frankie and Benny’s estate (details of the estate profile for this entity are included in the notes section below). The arrangements will have no impact on the group’s Wagamama, Airport Concessions and Pub operations.
The CVA will provide a mechanism to restructure the Leisure estate in line with the plan outlined in the group’s last market update (on the 8th April 2020) by reducing the current portfolio by exiting approximately 125 trading sites as well as seeking improved rental terms on a portion of the remaining trading estate.
Assuming the CVA is approved and successfully implemented, this will leave a remaining trading estate in the group’s Leisure business of approximately 160 sites. The CVA will also include a mechanism to exit approximately 25 previously closed Leisure sites, thereby further reducing the existing onerous lease provision held on the group’s balance sheet.
The proposals reflect TRG’s proactive approach to ensuring a long-term sustainable business for all stakeholders in the face of unprecedented disruption to the UK’s casual dining sector. The CVA will not seek to compromise claims of any creditors other than certain landlords, and inter-company liabilities. The rights and entitlement of all trade suppliers, HMRC and employees will not be affected by the proposals’.
• LondonMetric Property# – ‘Whilst the timing and suddenness of the pandemic were unforeseeable, many trends that we are seeing play out were already in the system and are being accelerated as temporary behaviours become more permanent. We are seeing events that were expected to take years to emerge now happening in months or even weeks. As a result, real estate performances continue to polarise, with many distressed sectors being severely damaged whilst the winning sectors are likely to see a wider margin of victory.
Our focus on owning the right assets in the winning sectors is delivering continued outperformance. Reliable, repetitive and growing income returns are the bedrock of future returns and underpin our progressive dividend. Our portfolio was materially enhanced by our activity in the year, particularly through the Mucklow acquisition, which significantly grew our urban logistics platform. Notwithstanding the uncertainty from Covid-19, we remain excited by the outlook for the portfolio. Quality investment opportunities that are seldom available in a normalised market are presenting themselves and, thanks to the support for our recent equity raise, we are approaching this environment from a position of strength and transacting on a number of excellent opportunities’.
• Shaftesbury – ‘Covid-19 update: supporting occupiers and collaborating with other stakeholders. • Initial impact in Chinatown from early February; West End began to close down in early March.
• Discussions underway with c800 commercial tenants to agree tailored solutions on rents and service charges.
• Aim to collect c50% of rents due from April to September 2020 over time.
• Moving permanently to monthly rents in advance for all commercial tenants from October 2020.
• Expect continuing evolution in structure of leases.
• Preparing our locations and buildings for recovery phase.
• Collaborating with neighbouring estates; supporting community partners through Community Fund.
• Marketing and PR to promote our areas and collaborating with other landowners to encourage return of domestic and international footfall.
Leasing and vacancy: activity since February impacted by Covid-19
• Leasing transactions completed with a rental value of £12.5m (H1 2019: £16.6m).
• EPRA vacancy up 1.1% to 4.8% following £2.7m scheme completions before period end.
• Majority of lettings under offer at 31 March 2020 not yet concluded, pending better visibility on easing of Covid-19 restrictions.
• Leasing activity expected to increase as confidence returns’.
• Quiz – ‘As previously disclosed by the Company, QUIZ’s standalone stores have experienced increasing trading pressures as a result of: • The enforced closure of all UK and Irish stores since 22 March 2020 in accordance with UK Government guidance;
• The accelerating shift in consumer behaviour towards online shopping resulting in lower high street footfall;
• The difficulty in renegotiating reductions to the high levels of rents and rates with its consequent effect on the economics of store retail; and
• A sustained period of macro-economic uncertainty in the UK which has impacted consumer spending.
Although management has been taking proactive actions to address the performance of QUIZ’s stores, including renegotiating rents on the expiry of leases, as a result of the above significant challenges QUIZ’s stores estate has been loss-making in the last year. The enforced closure of QUIZ’s stores since March in combination with significant levels of uncertainty going forward about the rate of recovery in consumer demand following the Covid-19 outbreak, has meant that the Kast business is not financially viable in its current structure.
The Board of QUIZ has therefore decided that it is not in the interests of the wider group and its shareholders to provide continued financial support to Kast. The directors of Kast will therefore seek the appointment today of Blair Nimmo and Alistair McAlinden, licensed insolvency practitioners from KPMG LLP, as Administrators to the company’.
• VP – ‘Group revenues into April 2020 have dropped off at varying rates dependent upon the markets which our businesses served. During March it was difficult to predict how far the closures of our customers’ activities would go. By the beginning of April we could identify a core of customers who were supporting essential service providers e.g. health service, utilities, rail etc. and we geared up our business to be able to service these vital sectors whilst at all times making the health and safety of our colleagues and our customers a top priority.
Subsequently, during May, the housebuilding sector and general construction as a whole has seen a gradual return to work at a reduced number of sites and with strict safe working practices in place.
Certain of our businesses experienced limited revenue attrition, though the majority saw weekly revenue falls of between 20% and 70% compared to the norm. As a result the capacity requirements in our business were significantly reduced.
Whilst we kept many of our operating locations open for business throughout, in support of those critical sectors requiring our services, we initially mothballed some sites and participated in the government’s job retention scheme, furloughing approximately half of our UK employees at its peak in April. We have since re-opened branches and taken employees out of furlough as demand has recovered.
In addition we have stopped all bar essential recruitment and capital expenditure.
The annual salary review at 1 April 2020 has been deferred and all senior management (50 in total) including the plc Board have taken a voluntary 20% reduction in salary to the end of June with many employees also working a four-day week until capacity requirements change.
The Covid-19 pandemic has been equally challenging for our colleagues in Australia, New Zealand, Malaysia, Singapore, Germany, The Netherlands and elsewhere. Some countries have fared better than others but all of our businesses have been impacted. As we enter June, the backdrop generally appears to be improving and businesses are slowly recovering revenues.
We entered this economic crisis with an excellent business and, as best as we can manage, we plan to exit with an equally excellent business. The recovery may be slower than we would want but we are confident that we will see material recovery during the remainder of 2020 and into 2021, as activity levels return towards historic levels.
Outlook - When planning for the new financial year in January we were anticipating a year of progress, with the UK expected to enjoy a recovery in activity, particularly in the construction sector as Brexit-related concerns dissipated. The devastating Covid-19 pandemic has unfortunately put paid to those expectations and we have entered our new financial year with some unique and very different challenges.
Trading in April was very weak, May has improved and we anticipate there will be a slow, incremental recovery over the coming months.
Our ability to return fully over the next year to previous levels of activity will to a degree be dependent upon the pace with which our customer base returns to working, which of course will be dependent upon how quickly Covid-19 is brought under control.
Given the circumstances, we have withdrawn guidance for the next financial year until more clarity is available as to the impact of Covid-19 on the group’s customers and activities.
• The global economy could shrink 7.6% this year. Five years or more of income growth could be lost in many countries as a result of the pandemic, a new report by the Organisation for Economic Cooperation and Development (OECD) has warned.
• Japan’s lower house of parliament has approved an emergency budget worth more than £230bn, doubling the scale of measures to boost the economy after it tipped into recession. The budget includes subsidies for smaller businesses and cash for medical workers.
• South Africa’s Air Force headquarters in Pretoria has been temporarily closed after two people working there tested positive for coronavirus.
• Unemployment in South Korea has climbed to the highest level in more than 10 years. In May, the rate went to 4.5%, up from 3.8% in April.
• The Eiffel tower is due to reopen on 25 June.
• Top US coronavirus expert Anthony Fauci has warned that the pandemic is far from over.
• Brazil has fully restored coronavirus data to its website, following an order by the Supreme Court. The government controversially removed totals of cases and deaths over the weekend.
• The waiting list for hospital treatment in the UK could reach almost 10 million people by Christmas due to the backlog caused by coronavirus, according to the NHS Confederation.
• The spread of coronavirus cases is ‘highly correlated’ with the extent of air travel, according to a report by the Institute for Economics and Peace (IEP), an Australian think tank.
• The UK economy is set to be the hardest hit by coronavirus among the world’s developed countries, according to the OECD. In its latest global economic outlook, the OECD predicted Britain’s economy was likely to slump by 11.5% in 2020.
Coronavirus was brought into the UK on at least 1,300 occasions, a major analysis of the genetics of the virus by the Covid-19 Genomics UK consortium shows.
• The German government today eased entry restrictions for seasonal farm workers. From 16 June until 31 December, seasonal workers from the European Union and the passport-free Schengen zone will again be allowed to freely enter Germany by land or air to help harvest crops, the agriculture minister, Julia Kloeckner, announced.
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