Covid-19 help should only go to financially sound businesses
Here’s how the government’s £330bn loan package for British businesses could become very messy: if the state ends up supporting the likes of Intu Properties, the deeply debt-laden shopping centre landlord that failed to fix its balance sheet in happier times.
At first glance, taxpayer-backed assistance for Intu should be out of the question. The Covid Corporate Finance Facility (CCFF), which is the relevant Treasury-backed scheme for large companies, “is open to firms that can demonstrate they were in sound financial health prior to the [coronavirus] shock”, say the rules.
Intu, to state the obvious, was not healthy. The owner of the Lakeside centre in Essex and the Trafford centre near Manchester has £4.5bn of borrowings; the stock market values the equity at just £50m; and the company last month failed to land a £1.5bn refinancing from its shareholders, thereby creating a “material uncertainty” over its future.
Yet here’s a line from Intu’s trading update on Thursday: “We have an ongoing dialogue with the UK government and may look to access their £330bn support package.” But how? The package is not meant for companies that were already teetering on the brink.
Intu’s argument, it seems, is that commercial landlords also deserve support because the government gave tenants permission to delay rental payments for three months. And it’s true that tenants used the freedom: Intu received only 29% of rents due this month.
Come on, though, there is a limit to what the government’s bridging efforts can be expected to support. If the crisis lasts for months and months, then, yes, the short-term cashflow worries of commercial landlords could become a wider issue. But we’re not there yet.
British Land and almost every other large commercial landlord is able to absorb a temporary hit to rental income. Intu is less able to do the same because its capital structure was unstable long before coronavirus struck. Piling yet more debt onto the current huge pile would not be useful.
Intu’s crisis is one for its current lenders to tackle, as it always was. Thursday’s statement also said the company is seeking waivers on loan covenants from its banks. Good: that is the right approach.
The chancellor, Rishi Sunak, should stay well away. There are many more deserving cases than Intu to support.
Medium-sized companies may be too large for coronavirus support
In fact, the urgent problem with the Treasury package is the hole in the middle. Medium-sized companies are too large for the coronavirus Business Interruption Loan Scheme, where loans are up to £5m, but many will feel the CCFF is not aimed at them.
You can see their point. The CCFF language is all about public credit ratings, an unknown world for, say, a family-owned business with a turnover of £100m. Applicants are allowed to use a current lender’s internal credit rating or get a rating agency to make an assessment, but those are also unfamiliar hurdles.
The Treasury may have to show flexibility and imagination. It can lambast banks to lend more, but some of the red tape is of its own making.
Audit via drone at the time of coronavirus
What you need to be an auditor? Professional scepticism is the basic skill – and one lacking in too many cases in recent years. Now an ability to operate a drone could be handy.
To be clear, drone-control is not yet a necessary requirement. It’s just an example of what the Financial Reporting Council means by “alternative procedures” that auditors can use to seek evidence to support an audit opinion. If a conventional stock-take is impossible because premises are locked down under coronavirus restrictions, send in a flying machine with a camera.
Regulatory encouragement of such lateral-thinking should be welcomed. When uncertainties lie in every direction, there is a risk that auditors become inclined to take too much on trust. It would be a disaster if the definition of “fair and true” becomes watered down at the moment when companies’ “going concern” statements are about to become the most scrutinised part of the accounts.
The authorities’ bigger reform was to give companies six months after their financial year-end, instead of four, to publish audited numbers. That move seems sensible too: better to be accurate than fast.
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