While companies are continuing to run the "juggling marathon" cash/liquidity is in many situations actually stronger than many thought. But let's make no mistake, many companies are benefitting from the "run-off" of their working capital, cashing in on receivables and inventory, as well as significant government support programs. At the same time margins are squeezed and many markets remain challenging.
The answers management teams have found to this unprecedented challenge are rather impressive and I have no doubt they will continue to excel. The key reason for this success so far is a values-driven approach by leaders. My colleague Ted Bililies has written a thought-provoking piece about this: "The Kind Of Leaders We Need Now". Values-driven means equity-driven in the sense of creating an environment in which everyone is treated equally and fairly.
But there is "another equity" which surprisingly has played a much smaller role than it could have so far: Driven by the low-interest environment, companies have taken on additional debt and governments have also provided significant funding through debt-like structures. Combined with low EBITDAs, leverages have grown and it is about time to think about ways to strengthen the equity of companies.
This would allow for safer financing structures, create the headroom for future investments to tackle additional challenges like the green agenda and digitalization. It would also stabilize the banking sector.
This could include:
Tax advantages for equity investments
- It is vital to encourage a continued flow of funding for companies now, as many face up to the high debt burdens and overleveraged position that they may find themselves in as a consequence of financing programs putting debt first before equity.
- Keeping capital investments buoyant during these uncertain economic times is critical and rewarding investors for their bravery may be a strategy to employ.
- Should governments be considering how they could provide tax advantages to private investors in this way? For example, fresh capital brought into companies during the pandemic could be exempt from capital gains taxes, subject to commitments to keep this capital in such investments for a defined period of time.
“Public debt and equity swaps” of funds provided by governments
- Government financing programs around the world have involved the creation of new structures to hold these instruments, with existing similar ones also used. As a result, there is a significant risk that those entities become long-term state-run capital providers, which has seen limited success in the past.
- Could the debt and/or equity be best to be “cut” and distributed into many pieces, distributed to the inhabitants of the respective country (or at EU / US state level) to allow participation in the upside as well as the democratic control of these funds?
- Such a "public debt-equity swap" could also enhance acceptance for support programs.
Upgraded mezzanine programs
- High debt burdens and overleveraged status due to emergency COVID financing could, in a worst-case scenario restrict access to this financing in the future due to deteriorating credit metrics potential and restructuring measures required in the months to come.
- While owners are more than willing and capable of further large investments in their companies, they are limited or completely precluded in some jurisdictions from doing this without ranking last, should restructuring fail.
- Should governments consider additional flexibility in creating frameworks where this money, injected in such challenging times, is prioritized (or at least has parity with) other instruments, regardless of this particular source of funding?
Extended programs for employees
- A way for companies to strengthen their equity, reduce cost base and allow employees to benefit from a post-pandemic recovery would be to radically expand equity participation programs for employees.
- The current requirement to pay taxes and social security on stocks given to employees in lieu of bonuses on the day of awarding them currently makes these programs very unattractive in a number of countries.
- Developing a more harmonized tax approach in collaboration with governments would increase the attraction for employees to choose this approach as an alternative to bonus payments.
- Beyond the immediate cash management benefits for companies, related positives could include the cultural boost this approach could deliver from employee investments. Would an approach of this kind enhance buy-in regarding the delivery of company objectives, where success would bring greater financial rewards related to stock performance?