The Coming Liquidity Crisis Means Companies Have to Consolidate
This article first appeared in Bloomberg.
If you’re calling Steve Wybo, your business is probably not in a great place. Wybo advises what his firm calls “distressed and underperforming companies and their constituents,” which means he takes calls from executives up a creek. At advisory firm Conway MacKenzie Inc., he represents mostly auto industry suppliers, along with consumer-product and industrial clients. Since the auto industry is an economic bellwether—sales crash earlier and recover more slowly than those of other sectors in a recession—Wybo has a firsthand look at the kinds of negotiations private companies are having right now and what those wranglings tell us about how the next six months could shape up. Here are edited excerpts from his interview with Arianne Cohen:
Why haven’t a lot of companies gone out of business so far?
When they shut down in mid-March, most had about 60 days of invoices due. They were getting paid and had sent people home on furloughs or laid them off. They weren’t paying payroll. Some might have gotten PPP (Paycheck Protection Program) money. The money was there, and the liquidity was there.
My phone’s been ringing off the hook with, “We have no more invoices left to collect, I’ve used all the money I had, I don’t have any collateral, and I’m gonna default on my loans on June 30.”
So what’s going to happen?
We’ll have some forced marriages. For example, GM will call a healthy supplier and say, “I got a problem with a struggling supplier and can’t interrupt my production. It’s in your commodity. I really need you to buy the struggling company.”
When CEOs call, are they freaking out?
In 2006 to 2008 it was panic. The capital markets were a mess, the banks were failing, and suppliers were going out of business left and right. That’s not the case this time. The banks are willing to defer principal payments and adjust loans, and the government has billions of dollars out there. The CEOs are levelheaded and optimistic about their ability to weather the storm.
What’s your advice for executives doing the weathering?
Micromanage cash. Liquidity is key during a crisis. And don’t let down your guard until we find a vaccine for Covid—the health and safety of your people is critical.
How is all this going to affect private equity firms?
They’re gonna look at the bottom 20% to 25% and companies that were struggling prior to Covid. If the companies have liquidity, they make it—but they’re not going to get capital.
Are these poorly run companies?
No. In ’05, ’06, ’07, there were poorly run companies, and they went out of business. But before Covid, most suppliers were in pretty good shape financially and very good shape operationally.
So there are going to be some deals.
A few years from now, when these companies are flipped again, you’re gonna hear some big scores. There are a lot of good companies at reasonable prices and many turnaround firms out there that are good operators. They’re gonna make a lot of money.