Thought From an Industry Guru…Part One

Main Photo: Andrew Harrington of AHV Associates

Date: April 2020

Location: Perspective from the UK

Name: Andrew Harrington AHV Associates

First in a series: Andrew has been in finance for more than 30 years, working at global investment banks from the late 1980’s to the late 1990’s and starting his own investment banking boutique, AHV Associates LLP in 2001. They specialise in advising privately owned business on mergers and acquisitions, and all forms of debt and equity capital raising. Most of their work is in the hospitality sector.

His thoughts: This is the sixth major crisis during my professional career in finance. As with all these others, the general consensus is that the Covid-19 crisis is unlike anything before and that it will change the world.

My career began with the 1987 (global) stock market crash, when financial liberalisation and errors in several government policies resulted in huge moves in financial markets and a fear of another great depression.

Then we moved through the early 1990’s and the increase in interest rates to >15% to cure inflation. This caused a sustained downturn in the global economy.

The Asian financial crisis of 1997, caused by excessive foreign currency borrowing in emerging markets, resulted in many Asian and Latin American countries defaulting on their debts, and a fear of bank collapses etc.

The terrorist attacks in New York on 11th Sept 2001 were a major shock to everyone and had repercussions globally, especially in the travel and hospitality sector.

Finally the global financial crisis of 2008 to 2010 is certainly something that most people can remember and you do not need me to remind you how difficult that period was.

On each occasion, the general consensus was that we had not seen anything like it before and that it would change the world….and on each occasion, the general consensus was right, as it is now.

However, we are now in the eye of the storm and it can be very difficult to stand back and review things from a distance. My experience has taught me that now is a good time to force oneself to look through the current panic and focus in on the key factors that will determine the future of the economy generally, and all our respective businesses in particular.

Thinking clearly now is really important as it will provide perspective on the current situation and enable the implementation of a well thought through strategy to survive and prosper post crisis.

Do not forget that we know how to resolve the crisis, and it is well on the way to being resolved in China, South Korea, Japan and other South East Asian nations. In many of these countries, economic activity is now rising strongly.

• So far, governments have generally responded rapidly and effectively to ensure that businesses can survive the current crisis whilst continuing to pay employees. Banks have also been very helpful through delaying repayments and waiving covenants, and are set to provide government backed emergency credit, where needed. Landlords also seem to be pretty flexible and are willing to provide rent holidays or temporary reductions. These measures are critical as they remove the key link between a health crisis and an economic one. Governments have learnt lessons from the 2008 global financial crisis when it took over a year for them to provide substantial support to the economy. In short, provided the extent of government support promised is promptly delivered, there is no reason why affected businesses should not survive, despite the often precipitous drops in revenues.

• The financial system is very strong-bank capital is now many times higher than in 2007 and lending regulations have been much tighter in the period since then. All of this means that banks are now in a much better position to weather the storm and continue to provide credit, than in the post 2008 period.

Furthermore, there are billions of €, $ and £ in captive investment funds, many of which have substantial unspent ‘dry powder’. Dry powder levels are 1.5 to 2 times the levels in 2008. In addition, interest rates are at all-time lows, and probably going even lower so that if the banks and funds want to invest profitably, then their only alternative is to lend/Invest in the real economy.

With early and substantial government action having limited the scope of bankruptcies etc, there should be a rapid upturn in the flow of finance once it is apparent that there is a clear pathway to the resolution of the crisis.

At that point, equity and debt investors will be very keen to review company business plans/financing requirements as it will then be possible to make meaningful predictions as to the path of the business in the future, and assess investment risks etc. From that pricing and valuations can be determined and funding should start to flow.

To be clear, a return to normality is not a necessity for finance to flow, just a clear pathway to that point. As they say in the financial world, ‘buy on the rumour, sell on the news!’

• The crisis will result in the way business is done in the future changing, in ways that we do not yet understand.

This obviously could have implications for the hospitality industry but the underpinning to its success over the decades is that we humans are inherently social animals so we find it much easier to communicate in person rather than on a video call (!). We also like to explore and share new experiences

These two simple facts have enabled the hospitality sector to survive all of the crises mentioned above and, in all cases, emerge stronger.

So, assuming that the short term economic damage is limited, due to the swift actions of governments outlined above then, post crisis, there must be a good arguable case that the key drivers of the hospitality industry – business and leisure travel – should at least continue along the same growth path as before. There may be some areas of growth that are reinforced by the crisis, e.g business off sites and leisure breaks, and maybe some areas diminished e.g. travel for business meetings that could be conducted on a video call, but it will be some time before these micro-trends can be discerned.

A few of AHV clients

In short, hospitality businesses that were strong before the crisis, should be strong afterwards. Development projects that were viable before the crisis will be viable after the crisis. Acquisitions that makes sense before will make sense after.

• People ask me when normal service will be resumed to which I say that financial markets are a leading indicator of activity in the real economy. They are extremely volatile because right now it is not possible to make any meaningful predictions as to when the crisis will be over.
As soon as some clear data points emerge e.g. the rate of infections showing steady decline, a clear start to widespread testing, signs that government measures are working, then you are likely to see a strong rally in financial markets, as the uncertainty starts to decline and investors are able to begin making predictions on the outlook for economic activity, whilst being able to assess the risks associated with those predictions. This ability to make forecasts and assess risk are prerequisites for debt and equity investors to value companies and price risk, which in turn enables them to commit to supporting funding opportunities.

That will be the beginning of the end for this crisis, and that is the time by which post Covid-19 strategies need to have been thought through, ready for implementation.

I don’t know when normal service will be resumed but I do know that our financial system is strong, governments have reacted quickly and the measures that we know are required to resolve the crisis are being taken.

The time to start planning is now

THPT Comment: Wise words from Andrew, based in London…we invite our friends and colleagues from different parts of the world to give us their insight into how it is now, how can we make the best of it and how our world might change in the future….

The Hotel Property Team (THPT) is a small group of highly experienced business professionals. Between us, we provide a range of skills and experience which is directly relevant to those involved in the hotel property market.

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