Coronavirus: Why investment bankers say this crisis Is different, and worse

VC Circle

By Ranjani Raghavan & Ankit Doshi | 23 March, 2020

Typically, it is hard to catch a merchant banker over the phone during the day – especially on a Monday. But COVID-19, the fast-spreading disease caused by a novel coronavirus, has led to a behavioural change.

“Call anytime. We have a lot of time now,” a Mumbai-based executive at an investment banking firm’s equity capital markets desk told VCCircle.

This banker wasn’t alone. Many others are in the same situation as many companies have either delayed or cancelled their planned initial public offerings and stock markets are falling like nine pins. On Monday, India stocks suffered their worst day in history with benchmark indexes sinking as much as 13%.

Over the past month companies such as Equitas Small Finance Bank and Rossari Biotech Ltd have cancelled their IPO plans. Burger King India Ltd had to cancel its share sale after filing its Red Herring Prospectus, a rare occurrence. 

With primary market activity grinding to a halt, share buybacks and block deals would be the bread and butter for investment banks over the next few months, bankers say.

“We are living in uncertain times. Deal activity will fall sharply, though the situation is very different from 2007-2009 and 2011-12,” an executive with a foreign investment bank said.

A banker with an Indian brokerage said there is no scope of any primary market activity and that secondary transactions will also be impacted. “Valuations have taken a hit and it doesn’t make sense for companies, owners or private equity and venture capital investors to sell their stake via IPOs or follow-on offerings.”

On the whole, investment bankers say the mood was much better in 2008. At the time, only businesses—particularly financial services companies—were impacted. But this time people in general are feeling the heat.

This month’s stock market rout and the lockdowns will also impact negotiations for mergers and acquisitions. Almost every bank in the world grounded travel around mid-March. So logistically, it is hard to meet at one place and sign agreements. However, a handful of deals that were in late stages are getting announced, especially in sectors such as healthcare, which is likely to get a boost because of the ongoing pandemic. 

Simultaneously, law firms are furiously trying to work COVID-19 related provisions and clauses into deal contracts. 

From a seller’s point of view, any agreement that is signed now would include COVID-19 as a known risk but buyers can still seek a variety of indemnities depending on the case.

Barring legal provisions related to COVID-19, a lot of this played out during the 2008 global financial crisis. This was especially true of the investment banking community as the financial sector was the centre of the crisis at the time as two banks—Lehman Brothers and Merrill Lynch—had collapsed in the US and credit lines were getting squeezed. 

This time, say bankers, the difference is that this is a healthcare scenario that is impacting the health and well-being of employees and Indian businesses. This is likely to have a subsequent impact on the financial services sector – in the form of increasing defaults and bad loans over the next few quarters – and the broader economy.

The bankers also say that companies are watching out whether changes in consumer behaviour or employee behaviour could become permanent. There is concern about job losses and pay cuts, and there is widespread belief that many companies in sectors such as travel, hospitality, retail and restaurants may not survive this crisis. 

“The Lehman Brothers crisis was only limited to the banking or financial markets. It didn’t have any significant impact on the general growth and consumption cycle of emerging economies like India and China,” says Mahesh Singhi, founder and managing director of investment banking firm Singhi Advisors. 

Singhi said the coronavirus crisis may force people to defer every buying decision or discretionary spend like travelling, property purchase, wedding functions and entertainment activities.

“The far-reaching impact will be felt not only on consumption-led industries like garment, travel, restaurants and entertainment but also deferment of routine corporate expansion plans,” Singhi said. 

Cash is king

Bankers say the most critical issue for most companies currently is to secure credit lines and conserve cash. In 2008, India was not facing a credit crisis. But this time, there was already a crisis in the economy. India has been going through a credit crunch for the past 18-24 months—a period when several big companies such as IL&FS Ltd, Dewan Housing Finance Corp, Yes Bank and Jet Airways have collapsed.

No wonder, then, even the most seasoned companies are trying to preserve cash. The depth and the speed of the stock market crash has given pause to veteran investment bankers, too, because this means investors are expecting this to be a long-drawn-out struggle. 

For listed companies where owners have pledged their shares to raise funds, a collapse in equity markets makes it especially harder to survive.

Some bankers say PE firms are backing existing portfolio companies and that will remain their first priority for funding. It will be hard for a company that isn’t backed by a PE firm to get rescue financing quickly.

Most players are waiting for the dust to settle and for India to fully realise the fallout of the COVID-19 outbreak. Bankers say it may take three to eight weeks for India to see a peak, after which buyout funds and other strategic players may find opportunities. 

The executive with the foreign bank cited earlier said some dealmakers may sense opportunities for management buyouts, leveraged buyouts and control deals. But the flip side is there may not be many sellers available as they wouldn’t want to sell at a throwaway prices unless in case of deep distress, he said.

Many bankers say the crisis is still in its early days. But this is not to say there are no buyers. 

“PE funds may explore investing in listed and unlisted stocks as valuations will be low until full recovery happens and stressed industries will look for capital,” said Rajesh Narain Gupta, managing partner at law firm SNG & Partners.