Chapter 3 Recovering from COVID-19 – Three routes to additional capital

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Recovering from COVID-19 – Three routes to additional capital

Capital: A stabilising influence

Getting access to funds in order to resume operations and exploit future growth opportunities, is high on businesses’ agenda.

Our survey¹ of 205 corporate leaders showed that as they began to recover from the impact of the pandemic, they started exploring a combination of equity and debt solutions:

60 per cent of the respondents are looking for private equity investment
56 per cent are considering structured trade finance solutions
38 per cent are intending to restructure their debt

Those funds will also play an important part in enhancing existing working capital and meeting debt obligations in the near term. Yet over half of those surveyed said they’d had ‘limited financing support from traditional channels’ and faced ‘challenges in meeting existing debt obligations.’

¹Survey commissioned by Standard Chartered in June 2020 and completed by 205 corporates (annual revenue USD100m-500m) based in Mainland China, Hong Kong, Singapore, Malaysia and India

Sources of capital in a post-pandemic world

There are three core options when looking for sources of additional capital:

Unlock existing capital

Evaluate traditional funding sources

Explore alternative sources of finance

Potential funding solutions corporates are considering

Which of the following options have you explored recently or plan to prioritise over the coming months to improve access to external funding?

First option

Unlock existing capital

The pandemic has exacerbated the uncertainty and volatility already present in global markets. If there was ever a time when ‘caution’ was your friend, it is now. That’s why it is critical that businesses identify their core competencies* and strategic priorities before re-allocating capital resources. Streamlining non-core activities can be a very sensible move – but only if you are fully cognisant of what constitutes core and non-core. Once that has been ascertained, the organisation could begin unlocking existing capital by:

Divesting distressed assets or non-core businesses
Strategically divest any underperforming or non-core assets to help strengthen the balance sheet.
Postponing or revaluating any capital investment plans
Ensure planned capital expenditures still align with overall strategic direction, to meet short-term necessities, and build resilience.
Considering debt restructuring options
Restructure or refinance existing debt to take advantage of lower interest rates, longer maturity periods or even interest rate waiver. Or consider a debt-for-equity swap.

* Core competencies differentiate an organisation from its competition and create a company's competitive advantage in the marketplace. Typically, a core competency refers to a company's set of skills or experience in some activity

Second option

Traditional funding sources

Despite disruption, traditional funding sources such as capital markets and commercial banks are still viable options for raising capital. Businesses should seek to work with their banking partners to evaluate the suitability of potential capital-raising solutions. For example:

Fund raising via capital markets
Both debt and equity markets are potential avenues for raising additional capital, through:

Convertible bonds: These offer investors the relative reliability of bonds with the flexibility of converting debt into equity.
Green/blue financing options: Particularly relevant for sustainability-linked initiatives and businesses; companies could, for example, can issue a blue bond to raise capital from investors for their marine and ocean-based projects.
Issuing stocks: This can be via secondary offering or convertible preferred stock.

Financing solutions from commercial banks
An array of mid/long-term financing solutions are generally available from commercial banking providers, such as exceptional funding pools for COVID-19. Many financial institutions have special funding pools. For example, Standard Chartered has committed to USD1 billion of financing for companies that provide goods and services to help in the fight against COVID-19.

Read more about how corporates around the world have benefitted from this fund.

Case example

Companies tap into Standard Chartered’s COVID-19 funding pool to provide high-demand products in fighting the global pandemic

Third option

Alternative sources of finance

New capital can be found via a range of non-traditional or alternative sources. Some of these potential avenues are:

Private equity (PE) funding
Some 60 per cent of respondents to our survey are considering approaching PE firms. There is significant capital available via this source, and lenders are looking for high-potential companies.

Strategic investors within your supply chain
Businesses could find potential strategic investors within their current supply chains, such as key suppliers, buyers and investor groups.

Tap into government schemes
Businesses would also do well to see if they can avail of the additional financial schemes that government bodies are offering to help businesses weather the economic fallout from the pandemic, such as corporate financing provisions or loan guarantees.

Case example

Company steers clear of dilution and achieves low cost of capital with hybrid capital from private equity

Company background: Ireland-based company catering mainly to small and medium enterprises (SMEs) in countries like China

Q: Which funding solution might you be considering in the next 6 months?

Structured trade finance solutions
Raising capital through issuing bonds
Green/blue finance options
Restructuring debt
Rescheduling investments
Divesting non-core activity
Divesting distressed assets
Private equity
Government funding

Case example

Over 10,000 projects have tapped Enterprise Singapore’s schemes for growth and transformation initiatives

Capital: Powering the journey towards resilient growth

Accumulating capital will be vital for any business looking to navigate Stage 2 – the ‘Preservation and Stability’ stage – on the ‘Road to Resilient Growth’, and even more so when preparing for any strategic investments as they look to enter Stage 3 or the ‘Preparing for Growth’ leg of the journey. Concentrating on the organisation’s core competencies will be critical for success. So too will be getting the right kind of support from strategic and financial partners.

References:

PwC, ‘Looking beyond the short term: funding the future’
PwC, ‘Funding for the future: Preparing scenarios and disclosures’
Standard Chartered, ‘We’re committing USD1 billion to finance companies helping to tackle COVID-19, March 2020
Standard Chartered, ‘Moving Past COVID-19: Best practices for Treasurers’, July 2020
EuroFinance, ‘Managing treasury through the Covid-19 crisis’, April 2020
EuroFinance, ‘Before and after Covid-19: What can Treasurers expect?’, March 2020
Euromoney, ‘Private equity bets on post-Covid survivors with hybrid capital’, May 2020