Friday, 10 July 2020

A Winding-up Storm in the Making?


A winding-up petition has been filed against Pappa Rich Group Sdn Bhd which runs Pappa Rich restaurants.

Source: Facebook

Now Pappa Rich will turn to “Pappa Gone”. Covid-19 has made many casualties. Not just human deaths but companies dead. Moratorium may help some. An extension of moratorium by another 6 or at least 3 months helps in liquidity. But Bank Negara Malaysia (BNM) seems not too keen on that. So too the Minister of Finance. Isn’t it feasible to have interest serviced while principal is deferred to a later date?

The response is an OPR cut of 0.25% to 1.75% on 7th July, 2020. That is to stimulate domestic consumption. People are now more inclined to be cautious, including many businesses. It is not possible to stimulate consumption from near “dead” entities. Some may need a CPR and others a resurrection. An interest rate reduction is helpful after a judicious period of moratorium, say, up to December 2020. But BNM may have very good reasons not to have it.

Meanwhile, the number of bankruptcies and winding-up petitions will rise sharply in 2020 and 2021. Some economists may call it creative destruction. Hindu mythology has Lord Shiva ending life at the end of each cycle. Mythology or not, we need to assist those viable businesses that are put to sleep because of exogenous, unforeseen circumstances. Many firms are bleeding cash. In the U.S., Congress moved with a rescue package for small businesses totalling up to USD3 trillion. It may have “bought” time but that’s essentially what businesses need now. Otherwise a liquidity issue will turn into an insolvency case. For the U.S., the scenario for full recovery is 2-3 years. That is the “gap-financing” that is required. Who and at what price will this gap be financed? That’s the piece for the next President.

For Malaysia, the medium term scenario requires an institution to play the role of who “lives” and who “dies”. That is not a pretty picture, but viability must be determined independently. The closest we have come to is in the Asian Financial Crisis, and the “Danas” were created to save the banks. In the end, about 10 banks were deemed fit to live!  Could we do that for companies?  What do you think?
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Reference:

1.     Wave of COVID-19 bankruptcies poses next threat to US economy, 14 May 2020, Bangkok Post
2.     Are we staring at a bankruptcy storm? 6 July 2020, The Sun Daily
3.     Winding-up petition filed against Pappa Rich, 7 July 2020, Free Malaysia Today

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