COVID-19 and Global Valuation Impacts: Spotlight on Australia, Canada, & the U.K.

The member firms of Valuation Research Group (VRG), the global professional valuation arm of VRC, offer a unique perspective of their economies and markets as they’ve been feeling the impacts of the coronavirus.

Watch the second recorded replay of our three webcast sessions featuring a spotlight on pandemic-related market developments in Australia, Canada, and the U.K.

Moderator: PJ Patel, Co-CEO | VRC

VRG Australia: Simon Dalgarno

VRG Canada: Peter Ott

VRG U.K.: Fernando Da Cruz Vasconcellos

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Video Chapters:
0:00 – 2:16 Session and panelist introductions

2:17 – 20:27 COVID-19 socio-economic and market impacts

20:28 – 33:29 Government Economic Measures

32:08 – 41:59 Valuation Impacts (Impairments, Solvency, etc.)

42:00 – 46:07 Final panelist thoughts on the impacts of COVID-19

46:08 – 46:36 Closing

Webcast: COVID-19 Market & Valuation Impacts in China, India, Spain and the U.S.

Webcast: COVID-19 Market & Valuation Impacts in China, India, Spain and the U.S.

Watch the first of our three recorded webcast sessions featuring a spotlight on pandemic-related market developments in China & Hong Kong, India, Spain, and the U.S.

Moderator: PJ Patel, Co-CEO | VRG U.S., VRC
VRG China: Simon Chan, Executive Director and Kevin Chan, Senior Director
VRG India: Rajeev Shah, Managing Director and CEO
VRG Spain: Sandra Daza, Managing Director

+ Watch VRG’s First Webinar Session

VRC's COVID-19 Resource Center

VRC's COVID-19 Resource Center

Our professionals are continuously monitoring the rapidly changing environment and proactively discussing impacts and solutions with clients. Visit our COVID-19 Resource Center for continued updates and coverage related to valuation impacts.

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[Transcription]

Session Introduction and Panelist Introductions

[Jennifer Dries, Marketing Director | VRG U.S. (VRC):] Hello, this is Jennifer Dries, marketing director with VRG. We thank you for tuning in with VRG leadership, PJ Patel, Peter Ott, Simon Dalgarno, and Fernando Vasconcellos, as they address valuation impacts as a result of the coronavirus pandemic. We hope this will provide our clients and partners with the educational information they need to find certainty in a time that is quite uncertain. PJ, I’ll pass the floor to you.

[PJ Patel, Co-CEO | VRG U.S. (VRC):] Thanks, Jen. I’m PJ Patel, co-CEO of VRC and based in New York, and today, we’ll be talking about the valuation impacts of coronavirus around the world with several of my colleagues from Valuation Research Group. We’ll start with some intros. Fernando, do you want to give a little bit of background on yourself?

[Fernando Da Cruz Vasconcellos, Ph.D. | VRG U.K. (Valuation Consulting):] Hi, my name is Fernando Vasconcellos, I’m the valuation director at Valuation Consulting, which is the affiliate member of VRG group representing the UK, and I’m based in London. Valuation Consulting is an independent company with over a 20-year history, and we specialize in the valuation of companies, unquoted shareholders, investment portfolios, for various reasons, including tax, M&A, and mentor incentive schemes primarily. We also do several expert witnesses and assignments. And today, I’ll share my views from the UK’s perspective.

[PJ:] Thanks, Fernando. Peter?

[Peter Ott | VRG Canada (Peter Ott & Associates):] Hi, this is Peter Ott, and I’m the Canadian member of Valuation Research Group, based in Toronto. I’ve been practicing valuation for over 20 years, and so, I’ll provide a Canadian perspective on what’s going on in Canada as a consequence of this COVID-19 pandemic.

[PJ:] And Simon?

[Simon Dalgarno | VRG Australia (Leadenhall Valuation Services):] Thank you, PJ. My name’s Simon Dalgarno, I’m from Leadenhall. We’re the Australian member of VRG Group. We are a boutique specialist business valuation firm, and I look forward to giving you my views on how COVID-19 is going to impact valuations in Australia.

COVID-19 Socio-Economic and Market Impacts

[PJ:] All right, sounds good. Fernando, why don’t we start with you? Can you talk a little bit about the impact of COVID-19 on the UK? You know, what’s happening with the stock market, the economy in general.

U.K. Socio-economic and Market Update

[Fernando:] Yes, sure. Thanks, PJ. I’ll share my views on the impact that the COVID-19 crisis has had on the UK. So, the COVID-19 appeared in the UK in late February. The recent cases that have been confirmed are approximately 48,000 cases, and the confirmed deaths are approaching 5,000, as of yesterday.

Only 229 cases have actually recovered, and it’s still in the early stages, and I think a lot will unfold. But it really has taken a big toll on the stock market as a whole. So, stock markets around the world have suffered historic losses for the first three months of the year due to the huge sell-off linked to current coronavirus global pandemic and the crisis that it’s bringing to all markets. And in the UK, this really hasn’t been any different. Stock markets in the UK, they’ve suffered their worst quarter and one-day decline since 1987, and they’ve really dropped considerably over that period. To give you an idea of what that’s looking like, if you look at the FTSE All-Share Index, as of January 2, 2020, it was at around 4,231 points.

It had a slight increase on the 17th of January, but then it really hit a really long drastic low on the 23rd of March hitting 2,727 points. That represents plunging over 35 percent. It has since recovered over the last two weeks and slightly rebounded to 2,900 points approximately, but that still corresponds to a drop of over 30 percent as of last Friday.

Now, if we look a little bit more specifically into the bigger industries, the FTSE 200, it plunged 41 percent at the biggest low on the 19th of March. And right now it’s down 36 percent, also of last Friday. The FTSE 100, from the beginning of the year until now, it plunged 34 percent, and now it recouped slightly, rebounded slightly over the last two weeks, and it’s now at around a -28 percent drop, of last Friday.

So, economists really have tried to indicate that the impact on the economy has never been…it’s worse than the financial crisis of 2018, many say. It mimics a lot of things that other crises have, but what’s peculiar on this one is, because of the lockdown, and the scale and business really coming to a halt, no one has really anticipated this ever, in living memory, at least, and people are really trying to figure out what to do.

The Prime Minister was trying to delay the businesses halting here in the UK, but then, on March 16th, he really said, “People need to stay at home.” And then, on the 23rd of March, he instituted tougher measures and the full lockdown, specifically for London that had the most cases. And he said, “Well… these measures, they included only non-essential business would be open, except for supermarkets, big pharmacies, key workplaces, and medical facilities,” to really try to contain the disease. Everything else was closed.

I mean, this morning, I looked at the best-faring stock in the UK, and it was interesting to see if you look at the FTSE 100, mining seems to be quite stable, in a sense. So Polymetal had an increase of about 15 percent. Other companies in the gas, water, and utilities also have okay performances in the 5 to 4 percent positive. But then, you see, on the other hand, companies really suffering drastically. I mean, we’re talking about the bigger companies, we can only imagine other smaller…medium-sized and small companies. But to give you an idea, EasyJet, which is in the travel and leisure sector, it dropped by 59 percent.

Automobile parts by Melrose Industries, also in the FTSE 100, dropped all 62 percent. Carnival, I think, had one of the largest drops, which is travel and leisure, of -73 percent. So, these are unprecedented in recent times. If we look at also what’s happening to the GDP, OECD before the crisis, they had one kind of view on the world economy.

But let me just start with the world economy, and then I’ll touch on what the UK is looking at. So, the OECD, under the best-case scenario now with the current situation, the coronavirus, expect world growth to be about 2.4 percent in 2020. And that’s compared to 2.9 percent that was projected just last November of last year. So, the OECD has also indicated that, in the worst-case scenario, although nobody knows if this is really going to be the worst-case scenario, it could drop as low as 1.5 percent.

Now, the OECD has also looked at the UK and other economies throughout the world but the UK, in particular, has been downgraded, its growth from 1.2 to 0.8 percent for this year, 2020. And the Office of National Statistics, also in the UK, showed that the economy grew, well, 1.4 and 1.3 percent in 2019 and ’18, but that’s a significant drop.

So, this 0.8 percent growth forecast for the UK of this year really represents a reduction of about 42 percent to 38 percent in comparison to the previous last two years. Now, as I mentioned, this is unprecedented in the scale of how rapidly this is happening. I think it’s the fastest any market has actually crashed, in this scale.

And if the outbreak continues and people don’t know about… I think the key is, like, “What is the exit strategy?” or “How can businesses run that need to be out there, that need to be engaged outside of their, you know, locations that they’re working from now, which mainly are working from home or isolated?” I think the UK is projecting to have even far greater levels of contraction and potentially loss-making, so zero growth.

So, that’s in the very, I think, extreme cases. But as I said, I think the UK is in the early- to mid-stages, we haven’t peaked yet here. The cases are still rising, so it’s difficult to predict exactly to what extent you’ll have on the stock market as a whole, as well as, like, let’s say, unemployment statistics that I think we’ll discuss during this webinar as well.

[PJ:] Thank you, Fernando. Yeah, sounds like there’s a lot going on, a lot of moving pieces. And it’s interesting, as you look at the stock market, clearly, in the U.S., the markets are down significantly, approximately 30 percent. But last week, we were speaking with our colleagues in China and Hong Kong, and the markets there have recovered as COVID-19 has passed. And they’re now maybe 10 percent below their peak. So, clearly, out from where the low point in the markets were for them.

Australia Socio-economic and Market Update

[PJ:] Simon, maybe you can talk a little bit about what you’re seeing in Australia with regard to COVID-19.

[Simon:] Thanks, PJ. When I hear what’s going on in places like New York, and Spain, and Italy, I realize two things. One, Australia is a very much smaller population, and so, our numbers are proportionately smaller. And also, the other big thing that comes out whenever I talk to people is we’re coming out of summer. I think the Australian government’s worked very hard, and we’ve actually managed to flatten the curve very well. But we’re going into winter, so we’re likely to get a long period of exposure to this, and we may get a bounce, or uptake, or a problem, particularly in June and July.

So, to give you some idea of numbers, currently, COVID-19 has not had much cases in our community. Most of it has been acquired overseas and brought back to Australia. There are currently less than 6,000 confirmed cases in Australia, which is about 1/4 of a percent of the Australian population. Approximately 39 people have died to date, so our numbers are significantly lower. At the same time, we are seeing a dramatic drop in the number of people being diagnosed or reported cases on a daily basis.

The Australian government, as I said, has worked really hard to flatten the curve. All non-essential businesses have been closed, all international travel and travel between states has been suspended. Anyone returning from travel, even between states, must isolate for 14 days. All large gatherings have been canceled. Weddings have been restricted to five people, funerals to ten. Schools have not been closed, but there is less than a five percent attendance rate. We have two major airlines in Australia, both have reduced flights down by about 90 percent and laid off most of their employees.

We’ve a significant number of redundancies and small businesses closing. As with other parts of the world, the stock market has crashed. We hit a peak, the highest ever, on the 20th of February, 7,162 on the ASX 200. That’s fallen to approximately 4,500 on March the 23rd before recovering slightly. That’s approximately a 37 percent reduction on the top 200 stocks. So if you start going lower than that, of course, it gets worse. And that’s been matched by a huge increase in volatility. In fact, volatility has been higher than ever recorded in the past.

GDP, no one is even making any predictions. Probably the comment that is closest, or gives you a view as to what the government is talking about, the word they are using is hibernation. They want to put the economy into a prolonged hibernation until they can do something with COVID-19. And again, just to give you a broad indication, unemployment in Australia in the December quarter was 5.1 percent. Early predictions are that will be 11 percent or higher. So, we can get into government stimulation measures in a little while, but that’s sort of where the Australian economy is. Again, I’d like to finish off by saying, in some ways, we got in early, and we have managed to flatten the curve, but we’re going into winter, so I expect it to be a long period before we come out of it properly.

[PJ:] Very interesting, Simon. And I think, you know, you started by saying, you know, giving your size and population, and even the number of COVID-19 cases, but the impact on the stock market seems to have been the same. The percentages you’re speaking to are similar to the percentages we’re seeing here in the U.S., and, Fernando talked about in the UK as well.

Canada Socio-economic and Market Update

[PJ:] Peter, how are things in Canada? You know, number of cases. What’s the economy looking like?

[Peter:] PJ, you’ll be familiar with this expression, but in Canada, we often say that if the United States sneezes, Canada catches a cold. Well, in this case, the United States has developed a dry cough. And so the impacts are very much similar to what I’m hearing about in London and in Australia.

It’s really a supply-side shock. And similar to what Simon said, I mean, the government is really… it’s almost a self-induced coma, well, I heard one person described it as a self-induced coma to be able to give us time for the economy and the population to recover. In our case, you know, there are different testing approaches across Canada, depending on what province you are in because, in Canada, health care is a provincial responsibility, but they’ve discovered as of…and I know the number’s already changed today, but there are over 15,000 cases that have been diagnosed about 277 deaths.

And it’s interesting, those are the sort of front-end economic statistics that people begin with, as opposed to, “What’s going on with GDP? What’s going on with economics or with unemployment?” The other aspect in Canada is that we’ve really had a double whammy because it was at this point in time that Saudi Arabia and Russia decided to go into an oil price war, and that’s really impacted the price of oil for Western Canadian Select. I think, at one point last week, a barrel of oil got to about the same cost as a Starbucks® Venti Latte. And as a consequence, a lot of Alberta had been suffering going into this, in terms of their overall economy, and this has really impacted them significantly. So I can foresee specific measures coming out to address the Alberta oil and Saskatchewan oil.

It’s interesting, you know, stock market impacts are very much the same, the dates are almost the same. I mean everything was going along, that peaks were reached about February 20th, and in 23 trading days, you’re down 35 percent. So it’s a tremendous decline in value.

Unemployment, we were about 5.9 percent up until about in February. In the last three weeks of March, 1.5 million people applied for employment insurance. Normally that’s 27,000 – we’ve gone from 27,000 to 1.5 million. So, a lot of the government programs have been about, “How do we continue to have in place the connection and the bonds between the employer and the employee so that people aren’t going into unemployment or applying for employment insurance?”

And so, subsidy programs have really been about trying to support businesses to retain their workforce. You know, other aspects. The currency, you know, the Canadian dollar had been very consistent, around 75 cents. I mean, maybe one cent one way or another just before all this happened. And since that time, it’s dropped by almost five, six cents. So that’s a bit of a shock absorber for the Canadian economy because it, you know, means that the price of goods in Canada, or the production of goods in Canada, become a little bit cheaper. But, you know, it’s been a very dramatic impact, given how steady it had been going into this.

So, the Bank of Canada obviously has responded, and one of the things that they’ve done is, in an unscheduled rate change, they have reduced the Bank of Canada to what they really consider to be their theoretical lower bound. They’ve entered into the financial markets, and they’ve tried to reduce bid-ask spreads on specific things. They’ve supported commercial paper so that companies are able to continue to fund. So I can foresee the Bank of Canada balance sheet really expanding over the next little while. And one of the other things that they’re really trying to come up with what their view is.

A lot of people are doing arithmetic around what’s going on in terms of the economy. The Bank of Canada, on April 15th, I think, will come out with a monetary policy report. And it’ll be at that point where they’ll have a chance to really describe, using their economists, as to what the impact of this is. So it’ll be a couple of weeks before we see what that is.

So that’s kind of where things are at in Canada. Again, you know, one of the things that amazes me is just how quickly the governments have been responding. You know, people have been criticizing, “Well, you didn’t respond.” or “You could have responded faster.” or “You took two weeks longer than somewhere else.” Well, in government terms, in terms of programs that they’re coming up with, Bank of Canada Governor was saying he had 6 million people who were gig-economy-type employees, in other words, there was really no program to support them. And in the space of a week, the federal government came up with a program that basically provided them with support to get through this period. So you’re seeing things that are happening that are really quite unprecedented.

Government Economic Measures

[PJ:] Yeah, it’s very interesting, Peter. I think we’ve all tried to have our crystal ball out to see what the future is going to look like, and the crystal ball is pretty foggy and, quite frankly, changing on a daily basis, if not more frequently, it seems.
Each of you touched on the impact of unemployment and, you know, unemployment increasing, and I think really trying to get to Day 2, and with that, some of the stimulus from the governments. Do you want to talk a little bit about, you know, briefly, you know, the impact of government stimulus?

Peter, you started to talk about that. You know, is it working?

Government Economic Measures in Canada

[Peter:] So, I mean the programs have been announced. They have been backdated so that many of the programs will provide support effective March 15th in Canada, but the details are still being worked out. So, for example, there have been programs to support…effectively, the government is becoming the employer of the economy because they’re providing up to 75 percent of salary coverage of companies that have experienced a 30 percent decline in revenue during this period. And so, that’s a tremendous amount, and it applies to all companies. All companies, private, public, it applies to not-for-profits. It doesn’t apply to Crown corporations and other organizations like that, but it’s very broad-based support. And again, it’s meant to try and keep the relationship between the employer and the employee intact.

They’ve also come up with this Canadian Emergency Wage Subsidy, which is for someone who’s been working and has had income, and then all of a sudden that income has dropped. So, that is a brand-new program. These are all brand-new programs that have not been in place before. There’s also, for smaller businesses, they’ve provided bank loans, government-guaranteed bank loans, so that companies that had payroll of up to 1.5 million could get a $40,000 loan, which is interest-free, repayable December 2022. And if you repay it on time they forgive 25 percent of the loan balances.

Simon mentioned a lot of the travel restrictions that have been put in place in Australia, those are the same here. You know, and a lot of the other activity is, you know, pushing back timing in terms of when monies would be required. So, for example, if your income taxes were due on April 30th, that’s been pushed back several months, and any amounts of mail are pushed back as well. The same with HST and GST payments. So, those are the types of things that, you know, being put in place to try and support the economy.

Government Economic Measures in the U.K.

[PJ:] Yes. Fernando, how about in the UK? You talked a little bit about the potential for a significant increase in unemployment. ([Fernando:] Yes, sure.) [PJ:] Thoughts on government stimulus?

[Fernando:] Definitely. I mean, if we look at unemployment, the UK unemployment rate, in the three months to January 2020, was about 3.9 percent. Just to give you an idea, the approximate population that’s working over age 16 and up is about 32.9 million. And of those, 28 million are paid employees and 5 million are self-employed. Now, as I think Peter also talked about, the government’s trying to do everything to try to help everyone from the self-employed to the people that actually can’t go to work, that can’t receive a salary, to even children that can’t go, you know, to school and get the support, parents having to deal with that as well.

But I think recent statistics also have shown that this 3.9, which was quite low for the UK, due to the COVID-19 outbreak, it has actually increased already to 4.4 percent of unemployment. And it could reach, experts say, about 5.2 percent, basically wiping out all the employment growth seen over the last three years in just two months here in the UK. So that’s quite extraordinary. As well, I guess, the Office of National Statistics also showed that about almost one million people also applied for our government’s Universal Credit. Now, the UK really is suffering job losses like it hasn’t suffered, it’s unprecedented also, even compared to the global financial crisis.

So I guess some other experts as well, and economists, they forecast that unemployment in the UK, it’s going to be worse than the Great Depression within months if things continue the way they are. And they’ve never seen this sort of scale of rapid and concentrated business collapse. Some other economists have a more pessimistic look and they think that unemployment in the UK could reach rapidly six million people, which would represent about 21 percent of the entire workforce. That study also was done with a UK colleague and a U.S. colleague that were working together. And it was based on the U.S., also, I think, statistics that are coming out that unemployment could reach up, I think, about 52 or 53 million in the U.S. and that would correspond to 32 percent of the entire workforce.

When they compared it also to the financial crisis, which was quite interesting, is they’ve seen that this is happening about 10 times faster than we’ve seen in the past, again, I think due to the lockdown. I think, as was discussed in the exchange rate as well, foreign exchange rate, if we compare the pound sterling and the U.S. dollar in 2020, in the beginning of the year, on the 2nd of January, the exchange rate was about 1.31.

That started to drop significantly on March 9th, and then it hit a low on the 19th of March at 1.14. And that’s the lowest level it had reached since 1985, so over 30 years, 35 years. So, you know, it’s a 13 percent drop in value in comparison to the beginning of the year.

There were several economic measures that the government talked about. I think they did the stimulus package of about ₤330 billion, followed by two other ones that I think amount now to about over ₤645 billion in terms of stimulus. But even with that, I believe the investor confidence hasn’t been that strong yet, even with these stimulus packages.

And the exchange rate has rebounded back to 1.22, and that’s still a seven percent drop in comparison to the beginning of the year. I guess what’s happening, I think maybe in different areas around the world as well, is people are trying to go to…or they have high demand or high market demand for safe-haven currencies like the U.S. dollar. I think a lot of that has played a part as well on dropping the exchange rate. And ultimately, I think, in the short-term, it will really depend on if the new market data that comes… as you said, PJ, every day we’re receiving new data from the UK economy. It’s whether that’s reassuring investors that, you know, things are, you know, at least…people are talking about this V curve, and now it’s more of a U, are they seeing that trajectory come up again out of this U? And they’re also waiting for the UK government to even give more stimuli, or stimulus, right, to impress investors further. I think that’s what we’ve seen. In terms of proposals from government, I think if we look at the main topics or the main areas that they’re trying to support people, to mitigate the coronavirus crisis. I think, as Peter alluded to as well, it’s very, very volatile and uncertain times here in the UK, but they’re focusing on certain economic measures, and these would be all the state loans and credit guarantees for companies also trying to support employees’ salaries up to 80 percent.

Now, these things are changing all the time. Before there was a threshold of monthly, let’s say, salary cap, I think that’s been relaxed. Different types of companies also, I think, were eligible for that. But that’s changing all the time. One interesting data point was that, even with this ₤330 billion stimulus from the UK, it appeared that until recently, only ₤149 million, or ₤145 million were actually lent out to businesses. So that’s a really, really big bottleneck, and I think a lot of companies are finding it hard to go through the processes of getting, you know, approval for these loans. And banks have also been applying, I think, here in the UK…not all banks, but it’s what I’ve researched, interest rates are about 30 percent, which makes it extremely difficult, I think, for people to try to get these loans. And they’re requesting personal guarantees on houses and their companies. And I think the biggest issue is the speed of getting these loans. So, the company has cash-flow issues, it needs to pay rent, it needs to pay employees, it needs to pay for utilities and everything. I think the money is not reaching companies quick enough, and I think, globally, that’s something that we’re trying to address.

I think similar too, around the world as well, the UK has done a lot of tax deferrals, so they’ve also allowed for the submission of the returns or financial statements by two months. And also companies to defer tax. They’ve also done social-security referrals and subsidies, and, at times, also provided holiday or debt-repayment holidays for businesses. Again, so the government is implementing day-by-day, and the Bank of England also, I think, similarly slashed interest rates to 0.1 percent recently to try to, you know, stir up the economy again. But that really hasn’t played out, I think, in the way that all colleagues expected.

I think, to give you a perspective as well, there’s a small group of top ministers that are thinking about this every day, “How is the UK responding economically?” So, it revolves at the Prime Minister, the Chancellor, the Foreign Secretary and the Health Secretary, and the Cabinet Office Secretary, and that’s it. So they’re trying to actually think, like, “What can we do?” and I think the motto is, “Do whatever it takes to support the economy,” and continue offering this access to loans and things like that. But there’s been a lot of, let’s say, bad coverage of what they call here the Coronavirus Business Interruption Loan Scheme. Again, as I mentioned, very high-interest rates, sometimes you don’t need to give a personal guarantee if you’re borrowing up to ₤250,000, but a lot of companies need a lot more than that if they’re going to transition into the medium to longer term. So I think money needs to arrive at businesses a lot quicker. And I think one of the most critical things is the liquidity issues of companies right now in the UK.

[PJ:] That sounds good, Fernando.

Valuation Impacts (Impairments, Solvency, etc.)

[PJ:] Simon, I don’t know if you want to touch on that? You spoke about that a little bit in terms of unemployment government stimulus but also evolving into sort of the next issue on our plate, which is around valuation issues and what we’re seeing. I know in the U.S. they’re sort of multiple folds. I mean, on one hand, we are seeing more calls and questions around impairment testing, but there’s also sort of a basic discussion going on around valuation inputs, you know, discount rate, what multiples to use, control premiums, and things of that sort. So what are you seeing in Australia?

Government Economic Measures in Australia
[Simon:] Yeah. Good point, PJ. I’ll just pick up one point to show you the level of government support that’s going on in Australia, and many of the issues that have been discussed have also been discussed here in Australia. The current commitment, and we’re also up to round three, is A$320 billion across the forward estimates or in excess of 15 percent of annual GDP.

So, the Australian government is making huge commitments also trying to keep that relationship between employees and employers very strong, trying to put the economy into hibernation, and then allow us to progress from there. PJ, you’re absolutely right, though, there are huge changes going on in Australia, particularly, actually, around insolvency and bankruptcy laws.

Valuation Impacts in Australia

So Australia is a 30-June year-end, so we’re running up to our year-end. And at the end of each financial year, the directors must sign a solvency statement. Well, you know, that’s a very big statement to make right as you’re beginning to go into what could be the worst time for us for COVID-19. So there has been a relaxation of insolvency and bankruptcy laws.

But you’re absolutely right, the whole thing that we’re going to be dealing with in the run-in to 30 June, which is very, very soon, is impairment. And what are people dealing with? They’re dealing with a complete reduction in income, and they’re expecting to see discount rates go up. Our preliminary estimate is that discount rates may have moved up by 1.5 or even 2 percent, and that’s a very preliminary analysis. We’re going to have to refresh that in the next couple of weeks.

So, cash flow’s going to disappear, and discount rates are going up, and that means value is going to come down, whichever way you look at it. As we go forward, we’re also going to see a lot more of related-party financing and recapitalization, related-party mergers. We’re going to see the privatization of companies. They’re even talking about privatizing one of the airlines here in Australia. As I said, we’ve really only got two of them.

Now, in Australia, many of those related-party transactions require independent expert reports. So, a firm like us comes in and signs off whether the transaction is fair and reasonable. That will be something that the directors will need to consider as they go through and they’re trying to survive or trying to make strategic acquisitions, having to consider whether it’s in the best interest of shareholders. But you’re absolutely right, impairment is going to be a huge issue.

Valuation Impacts in Canada

[PJ:] Thank you, Simon. Peter, anything different in Canada?

[Peter:] I guess a couple of things that I would add to the comments, one is that in this period of uncertainty, certainly for the first quarter, I can foresee that many of the impacts are going to be dealt with and addressed through disclosures because it’s going to be almost impossible for people to get the cash-flow analysis and other things like that that need to be done in time. So, my sense is that you’ll be seeing, in Canada, a lot of additional disclosure around what the impacts could potentially be.

The most important thing, I think, going forward, I mean discount rates could go up 100, 200 basis points, but it’s going to be, “What are the cash flows?” And the interesting thing with the cash flows, it’s not necessarily how low is it going to go, because, you know, you can sort of predict what losses you’re going to have, is that, when is the cash flows going to start to come back up again? And that’s going to be sort of, to the point, “Is it,” you know, “a V shape or U shape?” The one I heard over the weekend that I thought was interesting was the Swoosh – you know, using the Nike® Swoosh®.

In terms of market reactions, I don’t think anyone’s going to be relying entirely on a market-based valuation approach. So, when looking at what is a market-participant price, you know, it’s not a fire-sale price. And the market only gives you some inputs, but it’s not the only input that you need to be thinking about. So I can foresee, certainly, the analysis—if you did sort of 40, 60, in terms of looking at discount rate and cash flow, I can see that now becoming sort of 20 and 80 in terms of the percentage of weightings and the amount of effort you spend. So anyway, that would be what I would see in terms of some of the impacts.

Again, Canada’s oil and gas sector, they’re going to potentially be facing a number of impairment issues just because of the double whammy that we’ve been experiencing.

[PJ:] Very interesting, Peter. I think you know, listening to you, we saw sort of the change from the V-shaped to the U-shaped return, and the Swoosh® sounds maybe a little bit more realistic as of today. But who knows? That may change by tomorrow.

Valuation Impacts in the U.K.

[PJ:] Fernando, any thoughts on the UK? Any differences between what we’re seeing in Canada and Australia?

[Fernando:] I think it’s quite similar in a lot of respects. I think one of the main things is transparency and also trying to disclose as much information as possible. I think that goes for impairment testings but also auditing exercises that, I think, have been quite difficult now. We were just talking this morning of how are companies that need to audit physical assets are going to actually be doing that? So that’s going to be very, very challenging. And how can they do it in the time frame that’s allotted for? I think that’s going to be particularly different for impairment tests when we look at property, plants, and equipment. Maybe the things that we concentrate on, there are more of intangible assets, intellectual property, and goodwill.

Perhaps they won’t have that much of an impact, but still, definitely, I think, transparency and the most amount of, let’s say, information that analysts can actually go through, or auditors can go through it to have a realistic view, as everyone said, on cash flows is absolutely critical.

As I think discussed as well, I think what will be extremely important is actually fair value as well. It’s going to be the true value for us to seek at this time of complete uncertainty. Also, I think I was reading here earlier this morning that several entities in the UK are also trying to look at accounting for financial assets, as there’s a decrease in the fair value of many assets, particularly in equity securities. Entities have to carefully consider and apply appropriate measurement impairment loss recognition requirements that are changing and relaxing sometimes, in some areas and others. I think one thing that I would say, it really depends on a case-by-case basis.

So, some companies, let’s say, if they’re online or have an online presence, they’ll be less affected by that, there’s going to be less uncertainty. They might actually even have an increase in share or stock price. Other companies will have to take a lot closer look at how it’s impacting them throughout. Other things that I can mention as well, I think recently the UK government…I think it was just this weekend…they’ve relaxed the laws as well to hold directors accountable or have their, let’s say, houses accountable for misreporting, I guess, until they can get the house in order if I’m correct.

So they’re being a little bit more lenient on the laws temporarily so people can try to get the house in order. That if they make a mistake, and it wasn’t intentional they’re not going to be penalized for that. Because a lot of directors were thinking, “Well, my company’s failing. I’m going to go into administration. I’m going to go insolvent. I have a lot to respond to the shareholders. How is that going to impact me professionally as a director?” I think that was quite important to ease a little bit the tensions, and at least to give further support on that front because that was really holding a lot of people back from acting, they weren’t really sure. I think we stated this before, there’s not a clear exit strategy of what to do. And I think things are coming out, in our field of valuation every day and how to best practice if you will. IFRS guidelines all encouraging us to share best practices and overcome this in the best way possible.

Final panelist thoughts on the impacts of COVID-19

[PJ:] Good thoughts, Fernando. Simon, any final thoughts from you?

[Simon:] Yeah, thanks. One quick one. Some of us are old enough that we do remember doing impairment testing through the GFC. One of the words of caution I would have for people is the mistake people or some people, made in the GFC was assuming it would be all right next year, assuming we would all recover next year. And therefore, we ended up with this impairment going over a number of years. My recommendation, within reason, is to make a decision and almost a conservative decision and write it off once, write it off hard, and then move forward with a relatively clean balance sheet. And, obviously, you don’t want to just write it off for the sake of writing it off, but taking a more conservative approach is probably a pragmatic outcome.

[PJ:] Fair point, Simon. Peter?

[Peter:] Yeah. Just, finally, I’d say a couple of things. One is not all industries are going to be impacted the same manner, so, you know, if you’re an oil and gas company, yeah, there’s potential for issues, but if you’re in a third-party logistics operation or something like that, at the height, you can foresee that companies like that are potentially going to become very important, going forward. Other things, if you’ve got software that’s in the training area, education is another area that you can foresee is going to become more important going forward. And then, the other thing is that I think there’s a tremendous amount of stimulus being put into the economy, so I think a mistake may be that people overcompensate for this in doing their valuation analysis. So I would temper a little bit the comments that Simon made to say that there’s a tremendous amount of uncertainty but we as valuers have to be prepared for the fact that, six months from now, we may very well be coming up with different judgments because there is so much uncertainty. And I think that’s something that we’re going to have to just live with.

[PJ:] Yeah. Fernando, any final thoughts?

[Fernando:] I think, the last thought that I had as well is we really have to think about what would be the exit strategy as multiple, I think, countries together. Because I don’t think anybody has come up with an exit strategy yet on “How are we going to resume?” I think as Peter has mentioned, I think Simon and you as well, PJ, it’s not just, you know, stopping with the lockdown and trying to get to business as normal, I think the world has changed in many ways, and it won’t be the way it was just a couple months ago. But I think importantly is, once the lockdowns or social distancing are eased and people are able to get into somewhat of a more of a normal lifestyle, how are we going to actually exit that? So, releasing lockdown could increase cases again, you can have second waves, I think, as was mentioning several colleagues, you know, in Hong Kong and other areas. How do we do that easing but then getting back to business? Because having this approach of extended lockdowns in months will almost irreversibly perhaps damage several sectors of the economy that we won’t be able to get back up and running at the speed that it needs to be. It won’t be rebounded quickly to support the most in need and world economies in general.

So I think that’s one thing that I’m really looking forward to trying to hear more countries sharing experiences. Now that they’ve shared some in the COVID-19, in some instances that were great, how will they share now into actually kicking up the economy and having this balance of lockdown/saving lives, which is the most important, but then knowing how to actually exit and come back into business?

[PJ:] Got it. Well, thank you, gentlemen, for your time. I enjoyed the discussion and getting your perspectives. Look forward to chatting again soon. Thank you.

[Jennifer:] Gentlemen, thank you all for taking the time to speak with us today. And for those watching, we welcome you to connect with any member of our panel. Please visit us anytime online at vrg.net.