The FTSE 350 Review: Covid-19 update

The seismic shocks delivered to the UK’s economy and stock market by the coronavirus pandemic have rendered our two-month-old FTSE 350 review redundant. Our companies team has therefore returned to examine the outlook for these companies, all of which, in one way or another, are heavily impacted by the crisis

April 8, 2020

by Mark Robinson

Two months on from our annual FTSE 350 review and the market has been turned on its head. Corporate actions that would have seemed unthinkable at the time of that review are now commonplace. With normal commercial activity curtailed, the constituents have been putting up the shutters, preserving cash and reducing working capital demands.

Income seekers have been left high and dry and share buybacks have either been shelved or cancelled outright. Certain industries faced immediate challenges. The UK government suspended rail franchises and airline fleets have been grounded. The lockdown could prove terminal for some restaurant chains, already struggling at the wrong end of the credit cycle, while grocers have begun rationing foodstuffs. Meanwhile, the insurance industry faces double jeopardy through a flood of claims and interest rates falling towards zero.

The list goes on. But it’s not only the radical nature of the change, but the rapid turn of events that have caught market analysts off guard. In just over a month from 21 February the 350 index lost a third of its value. We may have witnessed a short bear market rally following the initial sell-off, but the direction of travel over the next few months isn’t difficult to discern.

Nor is the reason why shareholder returns have given way to cash conservation and credit drawdowns. Liquidity is key to survival, but it isn’t just the strain of meeting fixed costs and servicing debt. The abrupt halt to trading will also have a disproportionately negative effect on companies that have a high proportion of capital locked into inventory that isn’t being converted into cash flows, to say nothing of the cash deficits linked to deferrals and impairments on receivables we’re likely to witness. In the long term, the pandemic might precipitate a more conservative approach to capital management, with negative implications for distributions and buybacks. It may also follow that debt covenants will narrow to take account of new risk management assessments.

If, by some miracle, the UK economy awakes from its slumber by early summer, income prospects will still be in the doldrums because of the widespread collapse in net earnings on which many payouts are predicated.

Write-downs will be the order of the day, but there are also troubles brewing for those companies still hamstrung by defined benefit (DB) pension schemes. Mercer’s Pension Risk Survey put the accounting deficit of DB pension funds for the 350 largest UK-listed companies at £40bn at the end of 2019. By the end of February that figure had climbed to £68bn. This is set to deteriorate further unless the government’s large-scale intervention in the economy triggers inflationary pressures, although it is likely that interest rates will remain at historic lows for the foreseeable future.

The good news is that the virus hasn’t knocked out industrial capacity and it is certainly true that low oil prices have a galvanising effect on commerce, but it is likely to be a long road back.

With events unfolding so rapidly, this resource will inevitably go out of date. We will endeavour to update on developments and will also maintain this easy reference guide to all the FTSE350 constituents as and when they update the market.

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

Banks face capital test