"From the ashes, a fire shall be woken, A light from the shadows shall spring..." — J.R.R. Tolkien
COVID-19's impact on businesses and economy
The entire world is currently witnessing an unprecedented scenario due to the advent of Covid-19. The global economies have subjected themselves to lockdown and have resorted to social distancing measures with a hope to cut down the chain of infection, at least till we get to see some kind of a vaccine to address this gargantuan pandemic or at least the covid cases show a downward curve. The closing down of activities have certainly crippled economies who are staring down on such magnitude of financial challenges hardly encountered before. Businesses have come to a screeching halt. A once only a health crisis has now additionally metamorphosed into an economic catastrophe. The speed and the grasp of this pandemic has been unfathomable and has caught everyone unawares.
One thing we can say with certainty is that there would be a gradual but sure resurrection of businesses and economies. But by the time, this deluge stops, one could only imagine the annihilation that it would have done. There will be significant change in the manner of economic restructuring after Covid-19 as there would be a need to relook and rethink on the turnaround strategies in the context of this 'new normal'.
This pandemic has undoubtedly elicited in substantial reconsideration on the aspect of drafting commercial contracts. A case in point is the 'Force Majeure' clause which is likely to be invoked and tested in most contracts and there is a high probability that the courts may witness a deluge of cases as a result of it. All of sudden one of the 'boilerplate' clauses of a contract has become a household name – it has gained a renewed significance and a fresh reminder of its subsistence to the draftsmen.
The International Finance Corporation (IFC), a member of the World Bank Group is helping companies by providing $8 billion in financing and preserving jobs around the globe, as was reported some time back.
The recent regulatory reforms and the refurbished Insolvency law has breathed a new life in the insolvency regime and distressed assets sphere in the country. The NPA mess may lessen and in turn give a new lease of life to the business of distressed assets.
Dealing with debt restructuring post COVID-19
Prior to the outbreak, the financial institutions in India were already reeling under the delinquency of loan defaults. This problem has prevailed despite various schemes and measures introduced by the RBI from time to time. Interestingly, the measures have been for both the financial institutions as well as the defaulting entities. Post covid, the challenges would be multifarious.
Sector specific impact of Covid 19
The pandemic coupled with lock downs, has unarguably affected certain businesses severely, namely travel, hospitality, hotels, food and beverage, airline and related businesses. This is primarily due to a complete embargo on public travel and adoption of social distancing. It would be quite simplistic to gauge the severe impact especially on the tourism sector which was eyeing a windfall at the onset of the peak holiday season in India but for the pandemic to bulldoze its dreams. Many small time players could be staring at the prospect of shutting down and if better, being acquired by the bigger fish, if that be the case.
There has been a complete derailment in manufacturing sector plagued by production shutdowns, labour and supply chain disruptions. The MSMEs and small businesses are the ones who have been hit the hardest.
Will COVID-19 affect acquiring distressed businesses in India?
Due to the pandemic, the financial year 2019-2020 ended terribly providing a body blow to the sale of bad assets as there were hardly any takers. This disturbed the maths of the banks and NBFCs who were expecting to lessen their bad loan burden. Going forward, both the liquidity and the valuation aspects shall become critical as regards the functioning of the distressed assets business in India.
One may not be entirely incorrect in apprehending that the next quarter or so could provide a hint as regards the impact on businesses whose viability and resilience would be tested. The near future could see a surge in the availability of distressed assets in India, especially in the travel and tourism, entertainment and other consumer dependent businesses. This may pose a good investment opportunity for private equity investors, ARCs and alike. This is in fact a 'good time' for these 'pack of hunters' to acquire distressed assets at 'drool worthy' valuations. This looks apt time to grab a strategic/controlling interest in businesses with fair fundamentals if one thinks from the perspective of private equity players.
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Originally published 12 May, 2020
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