Langton Capital – 2020-11-05 – PREMIUM – Lockdown starts, Comptoir, Rank, Everyman, jobs, insolvency etc.:
Lockdown starts, Comptoir, Rank, Everyman, jobs, insolvency etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
Langton’s brush with Covid has left it with a lingering taste of chicory.
We thought that various coffees, beers and other drinks have been adding chicory to the mix but, after much persuasion, we’ve decided that we may be mistaken and that our taste buds have yet to fully recover.
We had hoped that flirting with a novel illness would leave us with superpowers, as it has done for Mr Trump, but we’ll have to settle for chicory which, though it isn’t a patch on being able to fly or see through brick walls, is at least better than having the taste of onions or garlic permanently in your mouth.
Lockdown but sunshine and cold weather. On to the news:
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LOCKDOWN 2.0. COMMENT ON GOING CONCERN AND TRADING WHILST KNOWINGLY INSOLVENT. Discussions with auditors could be fraught. And trading whilst knowingly insolvent is once again a criminal offence. 5 Nov 2020:
• We’re not lawyers so please get further professional advice if you believe you need it. Herewith just a few comments.
• The future is uncertain. It always is but perhaps more now than usual. Dealing with uncertainty is, by definition, uncertain (and open to interpretation, emotion etc.)
• If you are into cash burn and don’t have an obvious source of income or capital, then auditors may ask questions as to the veracity of the Going Concern principle.
• Dropping this principle would have a huge impact on balance sheet valuations and the worth of the company.
• Start-ups can point to J-curves re revenues (a.k.a. jam tomorrow curves) and auditors may accept this (although not permanently)
• Shuttered businesses may be able to point to a reopening. But this will have to be profitable to qualify the business as a going concern into the longer term.
• Unprofitable businesses, that are currently shuttered, that don’t know when they will reopen or if they will be profitable when they do, could have an issue (we’re trying not to use the word ‘problem’ here)
Trading whilst knowingly insolvent:
• Basic advice is, don’t do it.
• Taking stock or services from creditors, including staff, suppliers, government, landlords etc without knowing when or whether you will be able to pay for it, just isn’t cricket.
• If you, as a director, do it, you could be in hot water
• Transatlantic lawyers Womble, Bond & Dickinson say that directors ‘could suddenly be very exposed once again.’
• They say the temporary measures introduced to protect directors and thereby head off ‘an avalanche of insolvencies during the coronavirus crisis’ have not all been extended beyond their deadline of 30 September.
• Specifically, it says ‘the suspension of directors’ personal liability for wrongful trading from 1 March to 30 September’ has now expired.
• Leading Scottish lawyers Brodies says ‘the reactivation of wrongful trading rules at the end of last month [end of September] marks the return of personal liability risk for directors of businesses that continue to trade while on the brink of insolvency.’
• The suspension of personal liability was one of a number of ‘breathing space’ measures. It has not been extended.
What is it?
• As mentioned, we’re not lawyers. See the references below & take legal advice if you feel it necessary.
• Company Rescue says ‘trading whilst insolvent is a legal term used to describe a business continuing to trade despite being insolvent. It can lead to a breach of several provisions of the Insolvency Act 1986 (including wrongful trading).’
• The gist is that managers may be throwing shareholders’, their own and creditors’ money down a massive chasm that they have little hope of bridging.
• Directors are protected from the consequence of their actions – but only if they acted reasonably, responsibly and within the law.
• Trading whilst in a hopeless position could make directors personally liable for the company’s debt.
• Reasonableness would be a term to be thrashed out by the lawyers. A degree of expertise as to cash projections and the like may well be expected.
• Fraudulent preference is a major no-no. It is illegal to favour your mates (who may be creditors) whilst the business goes down the pan.
• From the moment the directors know – or potentially should have known – that their position was hopeless, their actions could be closely scrutinised.
• This is actually quite interesting and we could go on and on. But we won’t. See the references below.
What it means?
• Unless personal liability is suspended (and it might be given the propensity for U-turns) it could mean that directors’ behaviour is different this shutdown to last
• We know of the resignation of at least one non-exec because of this worry
• Creditors (and their lawyers) will go after anyone with deep pockets. This could be non-execs rather than entrepreneurs (who could be ‘men of straw’)
• It would not be surprising to see more administrations this lockdown than last
• But there may not be enough administrators to do the job. Some companies’ directors may attempt to pull the ripcord but find that it is not possible to do so
• This, to use the overused word, is perhaps unprecedented. We will watch developments with interest and, as always, feedback would be much appreciated.
PUBS & RESTAURANTS:
• Hospitality trade bodies have written to the chancellor asking for compensation for the 7.5m pints of beer that they have been obliged to pour away. Brewers (and purchasers of the beer) were wrong-footed as the beer in question was brewed at a time when the government had repeatedly said that there would not be a second lockdown.
• Sector trade bodies warn ‘without an immediate six-month support plan, many of our viable hospitality businesses will irrecoverably fail with significant losses of jobs, livelihoods and a material long term impact to the UK economy.’
• Pubs and restaurants are now shut, other than for takeaways and delivery. Details below.
• Operators want 80% furlough payments, a further suspension of business rates beyond May next year, a 5% VAT rate for all of next year and an extension on the lease forfeiture moratorium. It doesn’t hurt to ask.
• The new rules.
• Details are now available. The leak and U-turns meant that not all information was forthcoming over the weekend.
• Premises may sell food and soft drinks but not alcohol between the hours of 05:00 and 22:00 for take-away. The purchaser may enter the premises.
• Delivery can continue outside of those hours and buyers may not enter the premises from which they are buying the product.
• Alcohol may be sold – but it must be pre-ordered and the purchaser must not enter the premises.
• Off-licenses may remain open as ‘essential retailers’ under the same conditions as food shops.
• Nothing may be consumed on the premises.
• CAMRA says it is ‘delighted that the government has listened to the concerns of thousands of CAMRA members, concerned pub-goers, and beer lovers who have e-mailed their MPs in the last 48 hours urging the government to allow pubs and breweries to sell alcohol as takeaway during the second lockdown.’
• It says ‘this is a vital lifeline for local pubs and breweries across England over the coming four weeks, giving them a lifeline of income and allowing people to support local businesses.’
• Sky reports that PE house Endless ‘is in advanced talks to buy Hovis after a bidding war against Newlat Food, an Italian food producer.’ Hovis is 49% owned by Premier Foods. The latter says it ‘confirms that a sale process for a potential transaction in respect of Hovis is ongoing. However, there can be no certainty that any transaction will conclude. The Group will provide an update in due course as appropriate.’
• Sky says ‘the price that Hovis will fetch is unclear, although Sky News previously reported that its current shareholders wanted in the region of £100m for it.’
• Springboard reports that shoppers in England flocked to shops yesterday to stock up ahead of the lockdown. The number of shoppers on Tuesday was up 19.1% compared with the same day last week, it says. Supermarkets will still be able to sell non-essential products from today.
Other Covid developments:
• Comptoir Group has this morning announced that ‘following the new Government guidelines which came into effect this morning, its venues will be closed from today until further notice.’
• Comptoir says ‘all appropriate measures are in place to reduce the financial impact of the closure on the Group, including the reduction of operating costs and accessing government support schemes where available.’
• Cash machine co-ordinator Link says that there has been a rush to withdraw cash since the lockdown was announced. Sunday withdrawals were up 27% on an average Sunday.
• The BBPA has said that the pubs sector needs ‘more longer term support to its sector to save as many as 12,000 pubs from permanent closure as they enter a second lockdown. The BBPA has also called for the Government to use this time to review the effectiveness and necessity of restrictions post lockdown.’
• CEO Emma McClarkin says ‘as our sector enters this second lockdown, we are fearful for the future. Sector member research estimates as many as 12,000 pubs are at risk from permanent closure unless the Government provides a longer term support package for the sector. Countless breweries and suppliers to pubs are also at very real risk of closing for good due to this second lockdown and its longer impact.’
• Ms McClarkin says ‘we warmly welcome all the support the Government has given our sector this far through the crisis.’ But she says ‘it is clear more support is going to be needed so our sector can get over this latest hurdle of a second lockdown and the inevitable further hit on consumer confidence. We also call on the government to take this time to review the restrictions on the sector within the tiering measures to ensure they are based on evidence, proportionate and necessary.’
• Meal Kit company HelloFresh is to expand capacity in the US. It says there has been a surge in demand. The company doubled sales in Q3 with CEO Dominik Richter saying ‘the trend towards eating more meals at home accelerated during the pandemic and we consider the key drivers for this to have become permanent.’
• HelloFresh says the number of active customers in its U.S. division rose 68.7% year-on-year in the third quarter. The number of active customers in all its other markets rose by 122%.
• Caffe Nero reports ‘the vast majority of Caffè Nero stores in England will continue to offer takeaway, Click+Collect and delivery via Uber Eats’ post lockdown. CEO Will Stratton-Morris says ‘whilst our service will be limited in England to takeaway, click and collect and home delivery, we will still provide a safe, warm and welcoming place for customers to pop into.’
• Ainsty Ales in York is to launch an online ordering service in order to service delivery and collection. The company says that sales initially dropped by more than 80 per cent during the first lockdown. Ainsty says ‘the e-shop will allow us to open our door to craft ale-lovers nationwide, just in time for the second lockdown.’
• The ONS reports that the number of people in the UK earning below the minimum wage rose 5x to 2 million workers since the start of the coronavirus pandemic.
• The ONS adds that more than half of jobs in the bottom 10% of earners in Britain were furloughed without a top-up
• Job losses. John Lewis says it is to cut 1,500 jobs, Sainsbury says this morning that it could cut around 3,500 roles’
HOTELS & LEISURE TRAVEL:
• Travel Weekly reports on a split in travel professionals between those who belief that ‘the lights have been turned off’ versus others who think the lockdown will make little difference to sales.
• Euromonitor International says that airlines will take a minimum of four years to recover from the Covid-19 pandemic whilst hotels and intermediaries will take even longer.
• Euromonitor says ‘the economy is forecast to contract by 11% in 2020 in the baseline scenario, with a potential rebound in 2021 of 5%, providing that there is not a prolonged period of social distancing measures.’ It says ‘inbound tourism receipts are expected to fall by 49% in 2020 in a best-case scenario.’
• IATA says that the second wave of Covid-19 & quarantine rules have led to aviation’s recovery stalling. It says revenue passenger kilometres in September was only 27.2% of the level seen in the same month a year earlier.
• IATA says capacity was down by a lesser 63% year-on-year meaning that load factors fell 21.8 percentage points to 60.1%.
• Hilton has reported Q3 numbers showing a net loss of $81m for the quarter, or 28p per share. The company says system-wide REVPAR was down by 59.9% in the quarter.
• Hilton CEO Christopher J. Nassetta says ‘our third quarter results show meaningful improvement over the second quarter. The vast majority of our properties around the world are now open and have gradually begun to recover from the limitations that the COVID-19 pandemic has imposed on the travel industry, with occupancy increasing more than 20 percentage points from the second quarter.’
• Hilton says ‘while a full recovery will take time, we are well positioned to capture rising demand and execute on growth opportunities.’ It says ‘since April, system-wide occupancy has increased month over month, with the most notable recoveries in Asia Pacific, the U.S. and Europe, with comparable hotel occupancy levels up approximately 32 percentage points, 32 percentage points and 31 percentage points, respectively, from April to September.’
• Marriott’s Arne Sorenson has said that optimism is gaining ground. He sees ‘optimism amid the ruins of 2020, a sentiment that will gain increasing ground if hoteliers remain collaborative, communicative, hard-working and transparent’ reports US journal Hotel News Now.
• Rank has commented on a Sky News story that it was considering a fund raise from shareholders saying ‘the Board continuously reviews the Group’s financial position and confirms it is in discussions with its advisers regarding a potential equity issuance of up to a maximum of 19.9% of its issued share capital.’
• Rank says ‘such an equity issuance would be intended to strengthen Rank’s balance sheet in this unprecedented trading environment. There can be no certainty that the equity issuance will proceed. A further update will be provided if and as appropriate.’
• In a statement remarkably similar to that from Comptoir Group above, Everyman Media Group has announced that ‘following the new Government guidelines which came into effect this morning, its venues will be closed from today until further notice.’
• It says ‘all appropriate measures are in place to reduce the financial impact of the closure on the Group, including the reduction of operating costs and the postponement of new sites, refurbishments and other capital expenditure projects, together with accessing government support schemes where available.’
• Everyman adds ‘the Group has a strong financial position and continues to have significant headroom in its banking facilities.’ It concludes ‘the Board continues to have every confidence in the strength of the Everyman offering and its long term opportunity.’
FINANCE & MARKETS:
• IHS Markit has reported the UK Services PMI for October saying the ‘data pointed to a much weaker rise in business activity across the UK service sector, with the rate of expansion the slowest for four months.’
• It says ‘there were also signs of a sharp reversal in demand conditions, with new work falling for the first time since June.’ Nonetheless, the PMI was 51.4 versus 56.1 where any number over 50.0 implies expansion.
• All eyes will obviously be on November. Markit says ‘employment numbers decreased for the eighth consecutive month in October, which was primarily linked to redundancies in response to shrinking revenues during the pandemic.’ Markit says ‘October data indicates that the UK service sector was close to stalling even before the announcement of lockdown 2 in England, with tighter restrictions on hospitality, travel and leisure leading to a slump in demand for consumer-facing businesses.’
• Still not many willing to be too definitive about the US election – although it does look as though Biden is edging it.
• Sterling lower at $1.2959 and €1.1039. Oil unchanged at $40.46. UK 10yr gilt yield down 7bps at 0.21%. World markets better yesterday & London set to open up around 37pts.
RETAIL WITH NICK BUBB:
Today’s News: As flagged by the well-informed Mark Kleinman on Sky News last night, the highlights of a busy Retail news day are that over 3000 Argos jobs will disappear (as result of the strategy review with today’s Sainsbury interims) and that the embattled and indebted home shopping business N Brown is raising £100m, through a placing underwritten by its founder and controlling shareholder David Alliance. There have also been updates from Superdry, Joules, Dunelm and The Works…plus the latest MPC pronouncement on interest rates/QE)…and the closure of all non-essential shops in England.