The outbreak of Covid-19, and the subsequent deterioration in trading across many sectors, threatens to expose the fragility of some companies’ balance sheets. With revenue streams cut short, the FTSE 350’s constituents have rushed to boost their cash reserves, by cancelling dividend payments, halting non-essential capital expenditure and drawing further debt from committed facilities.
Some groups, such as recruiter Hays (HAS), have also turned to the market to boost their coffers by issuing new shares. Raising cash among existing shareholders could also become easier for UK-listed companies after the Pre-Emption Group, a body that issues guidance on pre-emption rights and when they should be disallowed, recommended that investors consider supporting issuances by companies of up to 20 per cent of their issued share capital on a temporary basis. Under current pre-emption rights best practice, investors have first refusal on share issuances representing up to 10 per cent of issued share capital.
Companies with debt maturing this year, or even early in 2021, carry the greater risk of securing refinancing. Those companies with a substantial amount of debt maturing this year, which also have a high degree of leverage, include Kingfisher (KGF) and William Hill (WMH). If new debt is secured it may be on less favourable terms as lenders may increase the cost of borrowing to account for a more uncertain economic outlook.
The darkening outlook for some groups has been highlighted by a swathe of credit downgrades by ratings agencies. Standard & Poor Global has reduced IAG’s (ICAG) credit rating to BBB-, one notch above junk status, and placed it on negative watch, anticipating negative free operating cash flows this year. That's even after a substantial capital expenditure cut for new planes, as refunds to customers and fewer bookings cause working capital outflows. Other UK companies that the ratings agency has downgraded include Next (NXT), student landlord Unite (UTG) and Victoria (VCP).
Net debt/EBITDA (X) | Debt maturing in 2020/balance sheet debt (%) | Debt maturing in 2020/EBITDA (%) | |
Kingfisher | 3.1 | 25.3 | 7.4 |
Willam Hill | 3.8 | 19.3 | 130.2 |
WM Morrison | 2.1 | 9.7 | 23.1 |
Rolls Royce | 3.4 | 11.4 | 180.2 |
SSE | 3 | 8.4 | 34 |
Carnival | 2 | 6.7 | 14.1 |
Tesco | 3.4 | 6.2 | 12.7 |
United Utilities | 7.3 | 5.1 | 38.9 |
Rentokil Initial | 2.1 | 2.9 | 8 |
BT | 2.6 | 1.8 | 4.3 |
Provident Financial | 6.9 | 1.2 | 10.4 |
Centrica | 2.6 | 0.9 | 3.4 |
National Grid | 6.2 | 0.8 | 5.1 |
Source: Liberum, Bloomberg |
See below for our entire FTSE350 review:
FTSE350 profitability: the direction is clear but not the severity
FTSE350 Review: Coronavirus and the dividend dilemma
FTSE350 groups scramble for cash
Aerospace on the descent as defence stays on course
Construction hits the brakes once again
Coronavirus threatens electronics and technology
Engineering and industrials braced for a downturn
Few guarantees for financial services
Coronavirus slams high street doors shut
Insurers stuck between policies and politics
Miners hold on to their hats in Covid rout
Supermarkets thrive but coronavirus harms other personal goods
Oil companies suffer Covid-19 crunch
Pharma giants entering the testing fray
Property income prospects dimmed by Covid-19
Subscription-based models make for sturdy businesses
Downturn threat obscures outlook for outsourcers
Are telcos still a defensive play?