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COVID-19: 4 ways organizations mitigate balance-sheet impact

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Risk Culture|COVID 19 Coronavirus

By Neil Thomas | March 9, 2020

With the ripple effect of COVID-19 being felt around the world, organizations need to mitigate potential financial impacts to the balance sheet.

The recent outbreak of COVID-19 has placed immense pressure on organizations with a myriad of potentially significant challenges to which they need to respond rapidly. As the impact of COVID-19 penetrates further into the daily business operations and causes further disruptions, how can organizations mitigate potential financial impacts to the balance sheet?

  1. 01

    Control costs.

    The immediate effect of COVID-19 has been a disruption of supply chains and a huge reduction in the number of people traveling.

    Most companies will have made provisions in their business planning for a slowdown in manufacturing and delivery during Chinese New Year, but the ongoing spread of the virus has meant that many Chinese factories are still closed, and the disruption will continue.

    Similarly, the number of people traveling, either due to restrictions imposed by authorities or voluntarily, has meant a huge drop in revenue for the travel and leisure and hospitality industries.

    Businesses will likely be inclined to lay off staff, particularly where factories are closed with no obvious opportunity to reopen. This is a drastic step that most governments are keen to avoid, and many have produced support packages for these affected industries. The effect of large layoffs on a workforce already suffering the trauma of the outbreak could have wide-reaching consequences.

  2. 02

    Consider force majeure clauses in contracts; trigger if necessary.

    If you are unable to perform or fulfill a contract as a result of the virus and the effect it has had on supply chains, review contracts carefully and look at “act of God” or force majeure provisions. Some parties have already done this. Force majeure may allow you some relief from expense if a contract is impossible to perform.

    Clauses and jurisdictions will differ in the consideration and treatment of the situation, but the China Council for Promotion of International Trade is issuing force majeure certificates to Chinese companies recognizing the outbreak as a triggering event, which also appears to be the position of the National People’s Congress.

  3. 03

    Talk to lenders – reschedule debt.

    There is generally a very high level of awareness in government and the financial community of the difficulties that companies are facing. Most are sympathetic and recognize the need to provide support to businesses in what we hope will be a relatively short-lived shock to trade. If debt repayment is likely to be a problem, talk to lenders early! In Singapore, banks have implemented measures such as moratoriums on repayments for affected corporate and individual customers, extension of payment terms for trade finance facilities and additional financing for working capital. These follow the guidelines on corporate debt restructuring issued by the Association of Banks in Singapore. The Monetary Authority of Singapore is supportive of these efforts by financial institutions to work constructively with customers affected by COVID-19 while adhering to prudent risk assessments.

  4. 04

    Pursue government help.

    Many governments have moved quickly to offer support to businesses. China is providing support to key enterprises and urging financial institutions to provide sufficient credit resources to hospitals and medical organizations to keep them operating and supplied. The Peoples Bank of China has committed to maintaining reasonable and sufficient liquidity in the financial market. On a regional level, the province of Hainan has launched a specially designed insurance product, backed by some of China’s largest insurers to act as a “social stabilizer.” The scheme is understood to provide cover for production losses, wages paid to employees in quarantine and costs incurred due to the suspension of operations as a result of the epidemic.

    In Singapore, the country’s annual budget statement delivered on February 18 included a package of measures totaling about US$4.3 billion to help companies, workers and households manage the effects of the outbreak. Hong Kong has produced a relief package of around US$3.8 billion, of which about half is targeted for industries that have been hard hit by the virus, including transport and tourism. Macau, largely dependent on tourism, and particularly casinos, has offered reductions or exemptions from various tourism related taxes for up to six months.

    How can organizations prepare to recover from this?

    All companies should take the opportunity to review their Business Continuity Plan (BCP) and adapt it to the prevailing circumstances.

    As the situation continues to change around the world companies need make sometimes difficult decisions to maintain a healthy workforce and balance sheet.

    We strongly recommend that organizations have developed and are execution ready for the recovery phase of their business continuity plan, before attempting to “return”to business” as usual.

    Willis Towers Watson is well positioned to assist our clients in understanding their pandemic business risk exposure. Please feel free to contact us to learn more.

Author

Head of Claims, Asia
Willis Towers Watson

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