By Ray Newman, Global Head of Transaction Advisory Services, Duff & Phelps, Kurt Steltenpohl, Managing Director, Transaction Advisory Services, Duff & Phelps, Nicole Kennedy, Director, Transaction Advisory Services, Duff & Phelps
About 150 years ago, Louis Pasteur uttered the immortal words “Chance favors the prepared.” Never have those words been more relevant in business than in the current economic environment. The COVID-19 pandemic has upended the way most businesses operate and the landscape for acquisitions and divestitures. This is pushing organizations to identify new ways to generate cash flow while reducing expenses, leveraging strategies and operating models that will stand the test of time.
In the current crisis, most businesses have quickly established a cash forecasting model and evaluated cash optimization scenarios. They have managed their businesses to pre-existing revenue stress scenarios, each with the associated liquidity and cost control measures to create stability.
Immediately following the outbreak of the pandemic, many companies furloughed or reduced the workforce in one or two waves, and remaining employees experienced salary reductions. Management postponed payments to vendors and generally increased days payable outstanding (DPO) by 5 to 15 days. To minimize fixed and facility costs, management shut down production lines for two to four weeks and issued notices to all property landlords of a potential inability to pay rent. In fact, most companies did not make rent payments for one to three months.
Organizations without a pre-existing plan can conduct a self-assessment to determine the impact on its business and take action:
|Workforce Impact||· Observing guidelines on COVID-19
· Business designation: essential vs. non-essential service
· Remote workforce capability
|Cash Flow||· Paycheck Protection Program – instituted in response to the COVID-19 outbreak
· Demand impact/customer access
|Operations||· Supply Chain
· Cost Evaluation
· Operating Model changes
As the quarantine began, management’s priority was to ensure the health and safety of its employees while maintaining continuity of operations by accommodating remote work arrangements to the extent possible yet complying with essential and non-essential business designations by local authorities.
Companies’ initial financial actions were to draw down on any available borrowings (e.g., lines of credit, revolvers, etc.) to ensure access to immediate liquidity. Management teams also calculated applicable ratios to understand incumbent concerns of the ability to meet debt covenants. There is now an ongoing debate between lenders and borrowers on what constitutes an extraordinary or non-recurring “loss” as defined in numerous loan agreements, which is the crux of establishing compliance or not. Successfully defending a loss due to lost revenue may determine who will be running the business through these challenging times: management or the bank.
The next step requires a detailed analysis of revenue, costs, and expenses, and “outside the box” thinking to identify unique approaches to preserve earnings by reducing costs without jeopardizing revenue. To do so, companies are analyzing their prerequisite cash forecast model (e.g., 13 weeks, 26 weeks, etc.) to understand the business’ primary financial and operational levers to reduce costs in the near term:
- Business Incentives – Obtain access to tax abatements/exemptions, wage subsidies and other incentives/loans offered by local, state and federal government.
- Insurance – Review business interruption insurance coverage to see if they will cover losses resulting from the pandemic.
- Working Capital – Identify opportunities to improve liquidity by shortening the order-to-cash conversion cycle and lengthening the procure-to-pay to vendors, especially lease, parking, and other fixed overhead payments
- Sourcing – Analyze spend categories and evaluate vendor agreements to determine if there are more cost-effective options for purchasing raw materials and identify potential supply chain disruptions. For upstream sourcing costs, companies can migrate long-standing single-sourced vendors to a competitive process and renegotiate contracts including trading off cost for term length.
- Footprint Reduction – Identify non-essential or surplus facilities and rationalize operations. This could include vacating or transferring operations to more efficient and profitable facilities.
- Product Rationalization – Analyze profitability of low demand products and identify opportunities to discontinue unprofitable products/services and to reduce customization options that contribute to low profitability
Survival beyond the immediate steps depends on the platform for recovery. Management may need to revise its operational roadmap, either accelerating planned operating model changes or adding new ones to ensure a viable platform for the post-recovery marketplace. For instance, the pandemic was merely the catalyst for retailers to finally align the storefront operational cost structure to the online eCommerce trend, many of them now using bankruptcy as a vehicle to do so. For manufacturers, the cost benefits of a majority global supply chain have been diminishing for a decade, and they may now shift more onshore to reduce cost and risk. For others, building capabilities in telehealth for clinics, contactless curbside pickup at restaurants, and cashless payment in general will streamline costs, enable revenue and meet new customer expectations, all of which require internal investment or a shift in acquisition strategy. The best companies are using the current ‘downtime’ and availability of management, office, and production resources to position competitively for a strong recovery.
The final step should include an evaluation of the results generated from the prior steps performed. This will help management determine if any additional steps should be taken (or prior steps repeated) in order to optimize cash flow and preserve the economic health of the business. Continual re-evaluation is key to success as it will allow for real-time changes to adapt to the changing environment.
Amidst the change activity on the shop or retail floor, the landscape is also shifting in executive offices and board rooms. Transactions being conducted during this period are colloquially referencing “EBITDAC” (earnings before interest, taxes, depreciation, amortization, and coronavirus), and the SEC released guidance on COVID-19 related expenses and disclosure. One time/or non-recurring adjustments were always part of an adjusted EBITDA analysis, but with the pandemic’s wide-spread effects, adjustments are taking numerous routes and management teams are evaluating additional potential adjustments:
Additionally, transaction diligence priorities for both buy- and sell-side are focusing on the following:
- Validating adjustments to normalize ongoing operations and expenses;
- Appraising the business and valuation model to ensure it accurately reflects COVID-19 realities;
- Evaluating the commercial environment and business strategy (position in the market, their customers and suppliers and the impact on these entities);
- Securing terms with lenders that are favorable given the current environment;
- Conducting cyber examinations that also includes work from home analysis; and
- Assessing insurance coverage and the necessary inclusions of business interruption and representation and warranties.
The business environment is becoming more complex while the shape of the recovery remains uncertain. Most clearly, company action to reduce risk is paramount for success, and preparation is the key.
Grey skies ahead – Malta prepares for a gloomy 2021 if they can’t tackle financial crime
By Dhanum Nursigadoo, ComplyAdvantage
With the summer drawing to a close, many countries who rely significantly on warm weather tourism will be assessing the impact of Covid-19. Being a small island in the middle of the Mediterranean you would expect Malta to be taking a significant economical hit – just like we are seeing in other popular European holiday destinations – but this doesn’t take into account the strength of the Maltese economy.
Emerging from the eurozone crisis with one of the most dynamic economies strategically positioned between three continents, Malta has had one of the lowest unemployment rates in the EU and has recently seen its GDP growth expand year-on-year. But perhaps the most important aspect of the Maltese economy has been its attraction for foreign businesses with only a 5% tax on profits. It is no secret that Malta is a tax haven, probably one of the most effective tax havens in the world.
But you can’t pick and choose who takes shelter, and it’s no secret that money launderers have been taking advantage of the regulatory landscape in this archipelago.
The conditions of a tax haven suit criminal enterprises, who can take advantage of the opaque environment and blend their illegal activities with the same operations enjoyed by high net worth individuals and corporations who are looking to reduce their tax bill. And last year Malta’s keenness for secrecy and avoidance resulted in a damning report by Moneyval – the Council of Europe’s Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) body – which found that while the nation had made some efforts to curb money laundering there was still much to be desired in order to bring the tax haven up to standard. Overall, they were of the opinion that Malta viewed combating money laundering as a non-priority and this resulted in branding Malta with low to partial ratings for 30 out of the 40 Financial Action Task Force (FATF) recommendations.
The findings of the report were stated to have the potential to “create within the wider public the perception that there may exist a culture of inactivity or impunity”. This follows on from a series of international high-profile stories regarding Malta and financial crime. Most shocking was the murder of journalist Daphne Caruana Galizia – who investigated corruption and money laundering in her native country – and was killed by a car-bomb three years ago leading to international outrage and condemnation.
Now Malta is in a race against time to turn their reputation around or they will suffer genuine consequences. The FATF have threatened to place Malta on a “greylist” of high-risk jurisdictions unless they have shown a genuine commitment to combatting financial crime and implemented the recommendations of the Moneyval report. If they fail, this would make Malta the first EU country to make the list and join others such as Panama, Syria and Zimbabwe.
The pandemic has actually given Malta more time to meet these obligations, and it has been widely reported that an initial summer deadline has now been moved to October due to the widespread disruption.
As we head into the autumn, there are signs that Malta has begun to take action. The Malta Financial Services Authority (MFSA) has created and established an empowered AML now headed up by Anthony Eddington, formerly of the UK’s Financial Conduct Authority and who has previous experience of tackling anti-financial crime at Deutsche Bank. This team has already begun working closely with international experts, specifically partners in the US through the US embassy in Malta and the United States Commodities Futures Trading Commission (CFTC). In May this collaboration led to 25 new cases focused on money laundering in particular, and with plans to increase standard inspections and on-site investigations into businesses in Malta, it appears there is a change to the country’s priorities.
Importantly, the report highlighted a problem for countries that choose to become tax havens. In some cases it was not that the Maltese authorities deliberately turned a blind-eye, but simply that they did not have the necessary knowledge to effectively tackle financial crime in the first place. Law enforcement appeared unable to even recognise when crime was occurring.
But this blurring of financial compliance will not help businesses if Malta does indeed become “greylisted” this year. While not as devastating as being blacklisted (the two occupants of this list are Iran and North Korea) there are significant detrimental effects to being put on the FATF greylist. Although this signals that the country is committed to developing AML/CFT plans (unlike the blacklist) it still sends out a warning signal to the world that this is a high-risk area, with the country in question subject to increased monitoring and potential sanctions from the IMF and the World Bank. Make no mistake, being put on the greylist will be catastrophic for Malta’s economy.
It remains to be seen how the work to avoid such a calamity will affect Malta’s tax haven status. Perhaps with an increased fight against financial crime there will be less ability to defend one of Europe’s most competitive tax regimes. But if Malta does not show they are genuinely committed to tackling this problem, then the pandemic disruption to the island’s tourism may be minor in comparison to the grey clouds that now approach their shores.
How will the UK prepare a supply chain for the distribution of the Covid-19 vaccines?
By Don Marshall, Marketing role at Exporta.
The challenge of mobilising a supply chain for the introduction of a global and nationwide vaccine will be enormously complex. The process will be costly, and it’s likely the figures will stretch to the hundreds of millions for both the production of the vaccine itself and its distribution across the UK. We must prepare and plan a supply chain strategy to ensure it reaches those most in need in a timely and safe manner.
The task of immunising a whole population is something that has never been planned or likely imagined by anyone within a standard supply chain. A supply chain that goes directly from the manufacturer to the end consumer, or user/ patient in this case, is complex and goes beyond the scope of any single logistics company. It would have to be conceived and delivered via a large joint effort and collaboration between multiple organisations. Effectively distributing the vaccine will depend on the source of manufacture, its storage requirements, and protection of the vaccines from manufacture through to patient administration.
The majority of vaccines require storage within a specific temperature range and need to be handled safely and in hygienic conditions. Depending on where the vaccines are manufactured, the transport legs will vary; if they are coming from overseas, air freight will increase cost and complexity. In addition to supplying the vaccine, syringes, needles and containers also need to be taken into account when preparing the supply chain.
Securing the specific types of boxes or containers i.e. the lidded containers normally used for transporting pharmaceutical products will mean acquiring them from all available stockists and manufacturers. Delivery vehicles would then need to be considered, with temperature-control factored in. The medical supply chain can inform their approach to distribution by assessing data from previous supply chains, and how large quantities of vaccines have been sent out in the past. Collating successful vaccine delivery examples from other parts of the world would be advantageous here, the more we can do to prepare for a logistical challenge of this magnitude, the better.
The distribution of this COVID vaccine will be unique in its scale and for that reason, additional supply chains will need to be mobilised. Apart from medical supply chains, those best suited for this type of transportation are the fresh/frozen food industries and supermarkets. I would mobilise these businesses to assist with the vaccine’s distribution wherever possible and use their car parks and facilities for the temporary medical centres needed to administer the vaccine to the public.
Using the food industry and supermarket networks would leave the current pharmaceutical supply chains intact for health services, pharmacies and the NHS. It would protect those vital services and continue to serve communities across the UK. Inevitably, it would place a short term strain on food supply chains, but these are supply chains that are well-equipped and versed in coping with excess demand i.e. the spike endured from the brief spell of public panic buying at the start of the crisis. With adequate resourcing and planning, I believe the UK supply chain can and will handle this challenge.
Dealing with the loneliness crisis with assistive technology
By Karen Dolva, CEO and Co-Founder of NoIsolation
Humans are social beings, and for most children, school will be their most important social arena. Unfortunately, however, many children and adolescents with long-term illnesses are unable to attend school for extended periods, due to treatment plans, ill health or more recently due to the risk of infection. Research has shown that long-stints of school absence for children and adolescents with Chronic Fatigue Syndrome (ME) and cancer can range from months to years.
These prolonged periods of absence, which often lead to limited interactions with other children and adolescents, can result in children completely losing their social network, leaving them feeling cut off, lonely and isolated, all as a result of something that is completely out of their control. What kind of consequences can this type of social isolation have for children and young adults?
In a recent in-depth investigation into the impact of COVID-19 on the emotional and educational development of British school-aged children, No Isolation partnered with independent researcher, Henry Peck, to look into the impact of COVID-19 on school aged children, to shed further light on the consequences of school closures, not only across the UK, but the long term effects that this can have on children and adolescents everywhere throughout the pandemic.
As a company working to abolish loneliness and isolation amongst those suffering with chronic illness, we were already aware of the effect that social isolation can have on a child’s educational development and mental health. For the investigation we collected responses from 1,005 parents and carers of 1,477 children spanning primary and secondary school.
Results of the study found that a concerning 76% of parents and carers reported that, since lockdown, they have become worried that their children are suffering from loneliness. Results also showed that parents and carers of 5-10-year-olds worry that their children are lonely often or all of the time, whilst parents and carers of 11-16-year-olds are concerned that their children are lonely at least some of the time. This is likely due to the fact that older children have greater access to social technologies, while younger children often rely on non-verbal forms of communication such as facial expression, physical contact, and through play, all of which is difficult to recreate whilst away from the school setting.
At No Isolation we are committed to creating solutions that will help children stay connected to their friends and their education, regardless of circumstance. We’ve seen first-hand the devastating impact that loneliness can have on a child, and know that children that can’t attend school don’t just miss out on learning, they miss out on friendships too. Losing this contact during the early years developmental stages can be devastating, leading to anxiousness and an increase in feelings of isolation. This report sheds light on the hundreds of thousands of young people that may not be able to rejoin their friends in school, and it is vital that they don’t fall through the cracks. We plan to continue researching the impact of this unprecedented pandemic and driving the conversation around how we, as a nation, can ensure the mental wellbeing and educational development of those most affected.
Loneliness has been found to have serious implications for both physical and mental health. People suffering from loneliness are 32% more likely to have a stroke and are 26% more at risk of early mortality. From No Isolation’s own research into the impact of school absence due to long-term illness, we have found that children are particularly vulnerable to loneliness if they cannot attend school.
Researchers, Perlman and Peplau, define loneliness as a negative feeling, stating that a lonely person is experiencing a discrepancy between desired and actual social contact. Being socially isolated is not synonymous with being lonely, but there will often be a correlation between social isolation and loneliness. Though much empirical research on adults and adolescents shows a link between loneliness and depression, many studies have found that friendship-related loneliness is more explanatory for depressive symptoms among adolescents than parent-related loneliness. One possible explanation is that friends are the preferred source of social support during adolescence.
With that in mind, we should be both sad and alarmed by the high numbers of young people unable to attend school, and more so by the fact that we do not really know who they are or exactly why they cannot go to school. Research has shown that social isolation and loneliness often correlate with mental disorders, including depressive disorders, there are, however, options available for children and adolescents in the form of assistive technologies, enabling them to stay connected with education and their peers.
The provision of dedicated school staff, inspirational hospital schools, the use of avatars like AV1 that enable children to attend school remotely, are just a few of the ways that assistive technology and exemplary attitudes are helping children with long-term illnesses from becoming disconnected from essential social networks. There are also examples of individuals who are pushing to keep children from falling between the cracks and becoming invisible, such as Amy Dixon, who is running a petition that will do exactly that, bringing these issues to the attention of those who can make a real change. It is, and will be, thanks to these exemplary changes that more support is being offered to children that are virtually invisible across the UK at present.
However, not all children have the option to receive these kinds of provision. There are pockets of excellent practice driven on an individual and local level, but there needs to be systemic change at a policy level, to ensure everyone is supported.
Educational provision for children out of school due to illness appears to be something of a postcode lottery, with some families having to fight for 3 hours of home tuition a week, whilst others are offered 15 hours by default. This is thought to be, in part, due to the open statutory guidance which allows for flexible interpretation of government guidelines, as well as financial limitations schools and city councils face. To improve the lives and outcomes of this group of children, is to create a more accurate view and analysis. This can be done by joining up existing datasets, by asking better questions, and by building a model that predicts future numbers of children from falling outside of the system. This, in turn, will push the issue up the political agenda and drive much needed changes to statutory guidance. Most importantly, it would lead to more support for children that are seemingly invisible across the UK.
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