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Wed 13th May 2020 - Opinion Special: A bridge over troubled waters by Propel insights editor Mark Wingett

A bridge over troubled waters by Propel insights editor Mark Wingett

Having been befuddled by Boris on Sunday, the UK’s hospitality sector has once again been reassured by Rishi. Of course, the devil will be in the detail later this month, but for now, the chancellor Rishi Sunak has again exceeded expectations in terms of the Job Retention Scheme (JRS) and its scope. Talk over the weekend was that Sunak was preparing to “wean” businesses and workers off the government’s furloughing scheme by cutting wage subsidies amid concerns that the nation had become “addicted”. Reports suggested he would look to wind down the scheme from July, leaving the majority of the hospitality sector on a cliff edge. Like his announcement launching the scheme, here was a more generous alternative route than many expected.

The scheme will now be extended until the end of July, with the government still covering 80% of workers monthly wage, up to £2,500 – employers can still top up to 100%. From August, the scheme will continue for all sectors and regions, but with greater flexibility to allow firms to bring staff back to work as the lockdown eases and the economy reopens. Under the current scheme furloughed employees cannot work. The scheme is currently costing the government about £14bn a month. It is supporting about 7.5 million jobs at almost one million companies, but Sunak said he “won’t give up on the people who rely on it”.

It is not yet clear whether the scale of the government contribution for different businesses and sectors will vary – and if the level of government contribution will change between August to October – with some sectors expected to bounce back faster than others, and hospitality set to be one of, if not the, last. From August, furloughed workers can also be asked to work part-time as businesses gradually ramp up operations again – but what their pay structure will look like is also uncertain, including whether full pay will be mandatory for the days when employees are working. There was a feeling that Sunak would take a more targeted approach for sectors that will remain closed for months – notably the hospitality industry – and withdraw it more quickly for sectors such as manufacturing and construction, which the government wants to reopen. However, he said that the scheme would continue to be available for “all sectors and regions of the UK” until the end of October.

It will be this variance that will be the next key step for the hospitality sector and it is hoped that the government will provide more clarity later this month, including a decision on whether it will continue to exclude tronc from the scheme. The hospitality sector currently has the largest proportion of employees on furlough at 80%, and with the government saying this weekend that pubs and restaurants should not expect to open until at least the beginning of July – and even then, it will be at much a reduced capacity in order to enforce social distancing, ongoing support might be needed beyond October, despite some parts of the sector starting to slowly open up again. The government will need to clarify when employers will be required to start making contributions, and how much they’ll be asked to pay. We need to see what is meant by a ‘shared effort’ of support from 1 August when we don’t know if employers will be encouraged or required to top up a reduced amount of support, in order to qualify. As shadow chancellor, Annaliese Dodds warned: “If every business is suddenly required to make a substantial contribution from the 1 August onwards, there is a very real risk that we will see mass redundancies.” The harsh reality is not everyone will stay on the boat and Sunak’s generosity might have other longer-term negative consequences, aside from the level of debt being racked up by the government and the threat of high unemployment figures. As Hospitality Union founder Jonathan Downey points out: “Today’s JRS extension feels worryingly too generous but we can’t complain about another month of 80% pay support for our furloughed people. It will make it harder to get some people back to work and it may mean we won’t see anything more after the end of October.”

All companies have been, and will be, making careful judgements about the short-term cost post re-opening at much reduced capacity, and planning for scaling back operations either permanently or until either social distancing measures are significantly diluted or are no longer necessary. That will be some time. It looks like there is scope for part-time furloughing, but the sector needs/wants to get back to work. Lavender Bank Partners Geof Collyer says: “The government knows that hospitality is a genuine, special case. There will be no votes in crushing the sector. It needs the special treatment to continue. The hospitality sector is not addicted to the furlough process. It is an absolute necessity to help stay in with a chance of remaining solvent. It is desperate to get back open again. But, with pubs and restaurants not able to open until 4 July at the earliest, this extension is the minimum that the sector would have expected. With social distancing measures likely to remain at least until the year end, and probably well into 2021, there is no way that the sector can reopen all of its sites at full capacity, so the furlough scheme will need to remain for a lot longer – especially as it is government policy that is preventing a full reopening.”

The chancellor’s announcement of an extension to the furlough scheme came just ahead of a key deadline this weekend for firms to avoid starting redundancy consultations for job losses at the end of June – if companies plan to make 100 or more people redundant, they need to start a 45-day consultation process. That cliff edge has been avoided but whether this delays or avoids the worst of the redundancy bad news for the hospitality sector will become clearer when more detail is provided later this month. Of course, there is also the problem, as Downey flags up, of getting some people back to work. As one twitter respondent said to the news of the scheme’s extension wrote: “I need to restart my business to avoid insolvency. I have a plan which ensures it’s done safely. The problem is my furloughed staff are finding every excuse not to return to work. How do I compete with a chancellor who is paying them not to work?” There is also a fear that some companies may be using the coronavirus crisis as cover for restructuring plans that would have already necessitated job losses.

However, in the short-term, the extension of the scheme may provide further possible shafts of light. As one sector founder points out about the scheme’s extension: “If we can find a means not to open unviable sites due to having to enact social-distancing measures in sites that our crowded by design then it’s huge. It also helps with the message to the landlords – the government don’t expect us to be open until the end of summer, reading between the lines of course. Or not in a viable manner.”

And what if it isn’t extended in some form for parts of the hospitality sector still nowhere near up to anything like full capacity by the end of October? Faced with having to actually contribute to the wages they can’t afford, could there be a large wave of businesses simply recognising it’s financially unsustainable on top of loans they’ve taken out to survive, and just wind up? It is hard to see the top line returning to 2019 levels for possibly two years, maybe longer; and for some, it is possible that it is unlikely to ever return to those levels.

With the next stage of JRS seemingly covered off for now, thoughts will turn to the next battle, perhaps the most crucial, over rent. With the next month’s rent quarter coming up fast, the government will soon have to step in, whether it likes it or not, and address the concerns of the hospitality sector, retailers and landlords. But that is for another opinion piece. Anything which keeps hospitality companies afloat and preserves livelihoods is of course welcome while revenues are close to, or are, zero. The extension to the JRS, certainly looks like it will do that for a while yet. However, there remains a pressing need for a braver, more nuanced approach to releasing lockdown and getting all people back to work, across all sectors. Rishi has kept the plates spinning, and for now we should be thankful for that.
 

Young’s provides financing and liquidity update: London pub retailer Young’s has reported it is in the process of finalising a new £50 million syndicated term loan facility and a new £20 million bilateral revolving credit facility. The company stated: “Lending banks have agreed to waive any technical ‘cessation of business’ breach of the company’s banking facilities as a result of the group’s pubs being closed due to the coronavirus pandemic. Lending banks have also agreed in principle to replace the company’s financial covenant tests at June, September and December this year and at March next year with a liquidity test. The company has been confirmed as an eligible issuer for the HM Treasury and the Bank of England’s Covid Corporate Financing Facility (the ‘CCFF’). Young’s has therefore established a euro-commercial paper programme for the purpose of issuing paper through the CCFF. Pursuant to that programme, the company has partially accessed the liquidity available to it under the CCFF by issuing paper with a nominal value of £30 million and a maturity date of 13 May 2021. The company has agreed with National Westminster Bank and HSBC UK Bank to a new £50 million syndicated term loan facility, to be split evenly between those two banks. Each bank’s credit committee has approved the terms of the facility, which will have an original maturity date falling on the fifth anniversary of the date the facility agreement is entered into. The company will have the option next year to request an extension of the maturity date by a further year and will then be able to do the same the following year. Once the documentation has been completed, the company intends to draw down on the facility immediately and repay in full the March 2021 £50 million syndicated facility with the Royal Bank of Scotland and Barclays Bank. The company is also in the process of finalising a new £20 million bilateral revolving credit facility with NatWest. The bank’s credit committee has approved the terms of the facility, which will have a maturity date falling on the first anniversary of the date the facility agreement is entered into. The company will have the option later this year to request an extension of the maturity date by a further six months and will then be able to do the same again next year. Once the documentation has been completed, the facility will be available to be drawn down, as appropriate, to be used for general corporate purposes. After the company has refinanced the Existing Syndicated Facility via the New Syndicated Facility and has entered into the New Bilateral Facility, the company will have in place £285 million of funds and committed facilities from its lending banks, private placement lenders and under the CCFF. In addition to this, the company has a £10 million overdraft with HSBC. All the company’s lending banks were supportive of Young’s accessing additional liquidity. They were also agreeable to the company refinancing the Existing Syndicated Facility via the New Syndicated Facility and to the company strengthening its balance sheet further by entering into the New Bilateral Facility. In addition, the company’s lending banks have agreed to waive any technical ‘cessation of business’ breach of the company’s banking facilities as a result of the group’s pubs being closed due to the coronavirus pandemic. They have also agreed in principle to replace the company’s financial covenant tests at June, September and December this year and at March next year with a liquidity test. With the group’s strong balance sheet, supplemented by the actions announced today, the company’s board of directors is confident that Young’s has sufficient liquidity to handle a prolonged period of closure of its pubs. The board expects the company to be in a position to return to profitable growth when this unprecedented period is at an end and conditions allow.”

Applegreen reports extra liquidity, reopening some Welcome Break food offers: Applegreen, the roadside convenience retailer, has completed a process to access additional facilities and secure its liquidity for the likely duration of the covid-19 crisis. The company stated: “The group has converted €52.5m of the accordion facility in its existing Applegreen banking facilities into its Revolving Credit Facility, which represents an increase to the committed funding available for the remaining term through to October 2023. Applegreen plc’s lenders have also agreed to substantially relax or remove covenant conditions for the tests arising in each quarter up to and including June 2021. There have been no other changes to the terms or cost of this multi-currency facility. We thank our relationship banks to the Applegreen plc banking group for their continued strong support for the group, and the confidence they have demonstrated in our business model during these unprecedented times. We continue to work constructively with the lenders of the Welcome Break banking facilities and expect to reach a similar conclusion shortly. Whilst it is important to have additional headroom in our facilities, we do not anticipate drawing down these additional facilities. We reiterate our view that we have sufficient cash to get us through this cycle based on a scenario where movement continues to be severely restricted to the end of May with the expectation that restrictions will then ease gradually before normalising in Q4. We also expect to have adequate existing cash resources to trade through a downside scenario where the recovery period is more prolonged, to the end of 2021. All our sites have remained open and current trading levels are ahead of our baseline assumptions for Q2 while the reduction in our working capital levels are consistent with our expectations. We also note that the recent easing of movement restrictions in each of our markets has resulted in increased traffic volumes. The Welcome Break estate has been the most heavily impacted by the crisis and, as anticipated in our scenario modelling, has experienced a higher rate of cash burn as the UK emerges from lockdown. We are anticipating a gradual recovery in volumes and are in the process of re-opening some of our food offers to meet that increased demand. The core Applegreen estate in the Republic of Ireland, UK and US is performing ahead of our original assumptions at the outset of the pandemic, and we expect to be cash positive from June onwards as working capital levels start to rebuild. The group continues to focus on cost reduction and, in addition to the extensive measures previously announced, the board has agreed to reduce the base salaries for executive directors by circa 20% from 1st April 2020 for a period of three months. The group has also implemented graduated salary cost reductions on a temporary basis for support staff across the organisation. Our priority remains the welfare of our colleagues and customers. We closely monitor government guidance in all the countries in which we operate in order to ensure the safety of our colleagues around the world as we continue to provide the essential service to the communities we serve.”

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