Trade “Wars”: Impact on Companies

"The time to repair the roof is when the sun is shining." - John F. Kennedy.

The current trade war may trigger a global recession and destroy many companies’ balance sheets. It is therefore time for a company to revisit its balance sheet to ensure its value is protected amid rising tensions. Increase in foreign exchange volatility and the Fed’s hawkish stance are other factors. It could review this by asking four key questions:

1.     Is the company’s gearing position in accordance with its business risk? Both the gearing ratio and business risk are inversely related. For example, Oil & Gas companies cannot have high gearing (as compared to Utilities) as it is sensitive to the business cycle.

2.     Does the company’s current debt position match its operating cash flow? Companies that have been using short-term debt to finance its capital expenditure or long-term working capital should convert it to long-term debt/ capital. For example, toll road concessionaires using short-term facilities to finance its project will have to restructure.  This is to avoid roll-over (or refinance) risk.

3.     Is the company exposed to foreign currency risk? Companies that have been using foreign currency loan (due to its current lower interest rate compared to domestic currency loan) to finance its projects should revert to a local currency loan if their source of revenue is mainly in the domestic currency. For example, a local water utility company paid in local currency (as compared to an airline company plying international routes) should convert its existing Dollar-denominated loan to the local currency in order to prevent the risk of default arising from currency depreciation.

4.     Is the company exposed to interest rate risk? Companies that have been using floating rate debt (due to the current low interest rate position) to finance its capital expenditure should convert it to fixed rate loan if higher interest cost cannot be transmitted to the customer. For example, Independent Power Plant concessionaires should not be using floating rate facilities to finance their project as they are usually not allowed to pass through the higher interest cost to the buyer. A negative margin arising from rising interest rate situation is then avoided.

Beyond the above, it is prudent to have more cash holdings than other assets. In a crisis, many PLCs and others fail to realise cash flow is the key to riding a crisis. Companies are driven by cash flows not assets. So a review of client base, debt ageing profile and the like are a healthy precursor to survival in the market-place. In fact, many companies with higher than usual cash holdings are able to deploy them in a difficult environment by acquiring useful assets on the cheap.