COVID-19 – an exceptional challenge

There is no longer any doubt: The COVID-19 crisis impacts society and the economy in unprecedented ways and with uncertain consequences – it has become a perfect storm.

Three parallel shocks
Whilst the so-called Great Recession (or Financial Crisis) of 2008 was primarily a shock on the demand side, the current crisis attacks businesses from three sides – demand, supply, and internal operations: demand because customers are now immediately stopping their orders and capex projects, supply because critical materials may no longer be available at the plants at the time when they are needed, and internal operations because workers and employees may not be able to work due to illness, quarantine, or administrative order.

Sectors affected differently
However, as shown in a recent paper from Roland Berger¹, not all industrial sectors will be equally affected. Whilst sectors like Pharma & Health Care or Nutrition will be hit partially or not at all, others like Travel & Leisure are already suffering heavily. The Machinery and Industrials sector can expect very significant – although not necessarily immediate and extreme – downside effects, with the demand side somewhat more affected than the supply side.

Scarce cash
All industrial sectors will have the same problem of liquidity requirements increasing significantly due to missing or delayed cash inflows. Protecting and enhancing the available cash levels will thus be essential in the weeks and months to come.

Many companies are about to face a scarcity or complete lack of cash. When? Very quickly within weeks or a bit later within months, depending on how the COVID-19 situation unfolds and how the market participants and public authorities react to it.

Outside support unavoidable
A very large number of businesses around the world will no longer be able to survive without the injection of liquidity from external sources. On the other hand, no government can afford to let a myriad of businesses go bankrupt. It is thus highly likely that in addition to the announcements made so far, many more jurisdictions around the world will provide financial support to the businesses in need of cash due to the coronavirus crisis. However, very few details are known on this to date.

Shareholders facing tough decisions
Should the liquidity support from the authorities prove insufficient, the only realistic additional source of financing in the given situation are the shareholders. They may have to make tough decisions on whether they are able and willing to provide potentially significant cash injections to businesses that would be stranded without them.

Christoph Haller
CFO / Risk Manager

¹ Corona and COVID-19: Active crisis management, March 2020.

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