Rob Bergman, Corporate Finance Principal at Bravura, considers the current economic crisis and what it means for businesses in need of cash in coming months.
The COVID-19 induced chaos in global financial markets has gone full throttle from mid-March as the Dow Jones and S&P 500 suffered their worst percentage drops since 1987. Since the beginning of 2020, the Nasdaq fell by 16% and the Russell 2000 index of small caps dropped by 32%. The Johannesburg Stock Exchange (JSE) suffered a total year-to-date loss of 34% by 23 March 2020 before rallying to end at a total year-to-date loss of 22%. The fall in global equity prices is indicative of the sharp decline in underlying economic activity that has presented itself and will have massive fall-out consequences over the coming months.
One of the problems the world faced during the global financial crisis in 2008 was a sudden end to global liquidity, leading to a complete meltdown of global financial markets and subsequently, economic activity. The current COVID-19 crisis started with a sudden decline in economic activity, which was followed by a halt in financial markets. Company cash flows are dropping due to lack of sales, household incomes drop due to closed shops and unemployment, which will filter through the value chain to the financial system. Global equity market values plummeted in response. Bond markets have grinded to a halt. Banks will not be able to provide further liquidity due to increased risk and volatility metrics as well as declined asset pricing, further restricting lending due to strict regulatory covenants put in place after the 2008 crisis.
This means that many companies will face an unprecedented cash-crunch over the next few months with no income or available debt to help them weather the storm. What remains is to tap into equity markets to stay afloat until better times present themselves.
With most JSE listed companies already trading at substantial discounts to perceived fair value before the crisis, share prices have tumbled to unprecedented lows. Any company in need of cash in the coming weeks will find it difficult to raise equity on the stock exchange, with investors looking to weather the storm and only come back to market to find bargain stocks with solid fundamental values after those companies that don’t have such fundamentals have faltered.
But for the slew of local small capitalised (small cap) companies that recently delisted from the JSE, the crisis could underscore the wisdom of their decisions. Their private equity partners are backed by deep institutional pockets that have every interest to keep the businesses capitalised, and the capital raising mechanisms of the unlisted space are doing so in most instances at fair value instead of deeply discounted market share prices. Therefore these businesses will have a good chance to keep going and grow market share while other companies might struggle.
Private equity will likely be able to do some interesting deals at great value through capitalising cash-crunched businesses that have strong remaining fundamental business drivers. Delisted small caps such as the recently announced Efficient Group delisting by UK-based Apis Partners might therefore accelerate and grow.
Cash will be king in the coming months, and those sitting on cash knows that its price has suddenly increased exponentially.
Rob Bergman is a Corporate Finance Principal at Bravura, an investment banking firm specialising in corporate finance and structured solutions services now in its twenty-first year. Bravura Holdings has a primary listing on the Stock Exchange of Mauritius and a secondary listing on the NSX. It has a presence in Mauritius, South Africa, Namibia and Australia.