Panik Journal 7 – “Where is my bailout” and Behavioral Change

My last “panic Journal” post is now 3 weeks old. What has changed ? If I look at my learnings, not much. We still don’t really know how many people have been infected, how it transmits, what is the actual cause of the deaths, if there are treatments and when we will have a vaccine. The only major difference is that toilet paper now is available in my local drug store every day and and stocks are even higher than back then.

It took me so long to write this, because every time I start to write something, I discover that someone else has already written about it, so I try to focus on stuff I haven’t seen elsewhere.

Where is my bailout (Leoni, Adidas, Start ups, Car purchase incentives)

Many people on the “reopen quickly” side of the argument usually say: Why bother, most of the Covid-19 deaths would have happened anyway maybe a few weeks later. However I have never heard the argument that many of the Covid-19 related bancruptcies would have happened anyway. In every talk show in Germany you see at least one restaurant owner or bar owner who claims that Covid-19 and the shut down destroyed his existence. However in Germany alone, around 20.000 companies go insolvent every year.

A good example is automobile supplier Leoni. The company grew by debt financed acquisitions, lost 40 mn EUR in a so-called CEO fraud in 2016 and was violating bank covenants already in 2019. No surprise then that Leoni was one of the first companies applying and receiving a generous “rescue package” from Government owned KFW already more than 2 weeks ago. Good for Leoni, bad for their competitors who maybe have run their companies much more prudent.

he first DAX company to apply and receive a big Government sponsored loan commitment was Adidas, the world famous sports brand.

Adidas is not only an icon in the world of sports but also the best performing DAX  company over the last 10 years.  2019 was a blockbuster year for Adidas. Top line increased by 8%, bottom line by 16%. The company had ~900 mn net cash at year end and predicted 2.1 bn EUR in profits for 2020. In the last 2 years, they bought back shares in an amount of 2 bn EUR.

However Adidas was the first DAX company to claim not wanting to pay rent because of the lock down and a few days ago they signed an “Emergency loan” from state owned KFW for 2.4 bn EUR (until 2021) and 600 mn from a group of banks. Part of the reason to apply for the loan seems to be the fact, that Adidas doesn’t have a credit rating. According to some press articles, the CFO considered a rating as unnecessary and “too expensive”. There are very little “Strings attached” to the loan, only that Adidas is not allowed to pay a dividend as long as the loan is outstanding.

I have nothing against Adidas, but I find it worrisome that such a superficially successful company is run on a basis that it cannot withstand even the beginning of such a crisis.

Another interesting bailout is for German start-ups. The Government committed to a 2 bn EUR support program that co-invests with Financial investors into start-ups.  On top of this, start-ups can access a couple of other pools for additional payments.

This is also interesting, as many Venture Capital firms have just raised large funds and many digital startups have business models that actually profit from the crisis. To me this looks like “if there is a free lunch then get it” situation where some smart VCs use the situation and the current weakness of the Government to increase their upside and limti their downside. I shouldn’t complain as this will most likely help also my portfolio company “German startups”, on the other hand I do think that restaurant and hotel owners would be higher priority victims.

Finally, our “beloved” German car industry is pushing hard for Government subsidized car purchase incentives, both, for electrical cars but also for combustion engines. Although they already receive transfer payments for “Kurzarbeit” and try to do everything to maximize the transfer payment, they claim that the car industry is too important for letting them work this out on their own. It is quite interesting how they can do this with a straight face after all the scandals and miss-management in the past few years.

If we look back a few years from now on this episode, I wonder how many billions (or tens or hundred of billions) were sunk into the wrong companies during this episode. It will also be interesting how companies react. If bailouts can be obtained so easily, why bother in the future running things conservatively ?

Behaviour changes

Whenever pundits start talking about the impact of the COvid-19 crisis and a potential recovery, either side starts with: I assume chaos/back to normal and then they develop their thesis. I have rarely seen a more detailed analysis how they came up with their assumptions. My current guess is that pundits project mostly their own attitude. If they are concerned personally, they are concerned for the world and wise versa.

In the positive scenario (efficient treatment and widely available vaccine), clearly long term impacts will relatively low. However no one knows when and if these solutions are available. So one also needs to look at a scenario where the Virus and the implict threat is hanging around for some time.

What I would be interested is the following: Will there be behavior changes effecting the long term ? If yes, how long will they last and what percentage of the population will be effected ?

Yes, there will always be a certain percentage of people who don’t care at all about the Virus and will jump into the next plane for a beach holiday if there is an opportunity. However there are also a lot of people who will be concerned.

The first interesting analysis I have seen is from Accenture. 

Some items are quite obvious, such as a certain permanent increase of home office. An interesting number is the percentage of “worriers”, who change their behaviour significantly. This percentage seems to correlate with the stage of the pandemic each country is in, but even in countries who have the pandemic under control, the percentage of “worriers” is still around 11%. The worrier is described as follows:

This individual is fearful of the future, anxious and reactionary— particularly with his or her purchases. He or she (77%) is worried about his or her health and is 25% more likely to be stressed or anxious as a result of the virus. This person is highly
aware of news.

These people will change their behavior significantly over the next few years. This looks a little bit like the latest theme of the Economist who speaks of the “90% Economy”, which is the assumption that we might not go back to 100% normal any time soon.

For investors, this is not so easy to handicap. What would a 90% economy mean for profits ? I guess it would not mean 90% of “pre crisis” profits, but depending on the industry significantly less. Yes, there are some winners (personal hygiene, personal health) but many longer term losers, too.

11 comments

  • Hi mmi, thank you for sharing these reflections!

    I thinking you nailed one of the big impacts:
    “If bailouts can be obtained so easily, why bother in the future running things conservatively ?”..

    Also, I just read the news that Sixt as well is getting a KfW+banks large line of credit at usual conditions.
    It seems they also lack a rating…
    “Infolge der durch die COVID-19-Pandemie verursachten außergewöhnlichen Umstände ist derzeit eine Finanzierung über den Kapitalmarkt selbst für stark kapitalisierte Unternehmen ohne Rating wie die Sixt SE nicht möglich.”

    But the price of their 2 quoted bonds remain quite stable over the past month, after the initial drop/rebound…
    https://about.sixt.com/websites/sixt_cc/German/2000/investor-relations.html#Anleihekurse

    What do you think?

    Also, I found Buffett remarks on Saturday very sobering. Better have cash aside for some of the darker scenarios…

  • Regarding Adidas, it’s pretty clear why they took the government loan: it’s cheaper than raising bonds (no underwriting fee, no credit rating fee, probably lower interest rate) and it’s like a revolver and relatively short term, so the company won’t be “stuck” with it after sales are back. It’s highly opportunistic, but it’s hard to blame them

  • I think the virus goes within 2 years, for example H1N1 mutated into a ‘normal flu’ in 10 months: https://www.channelnewsasia.com/news/singapore/covid-19-threat-could-erode-with-time-just-as-with-h1n1-say-12438600

    I don’t see long term changes to people’s behaviour. There were pandemics in 1957 and 1968, and things went back to normal. Diseases are a normal part of life.

    Govt spending is a change though.

    After a 1 month rally, the panic is now FOMO!

    • Well, there are some differnces in my opinion. In 1957 and 1968 you had to go back shopping, there was no real alternative. Now you have E-Commerce and everything is digital. Same goes for home office.

      In 1957 and 1968 there was no mass long distance travelling. Now there is (or was). We will see but in my opinion you are on the very optimistic side assuming everything is back to before in 2 years.

  • Henk Eleveld

    I guess it’s pretty smart to say that a bankruptcy is because of COVID rather than your own mistake. In the Netherlands we have a lot of small companies, which are funded by crowdfunding (because banks refused to loan) They didn’t exist in 2008 and they have no financial backbone. Especially leisure, bars and restaurants will be very vulnerable

  • In February, we decided to publish a bear compendium because we wanted to have something concrete showing before hand that the virus would only be a trigger. Years of financialization Godified central,bankers and sleeping regulators had enabled it. So yes many companies would have faced bankruptcies anyway https://research.nava.capital/bear-compendium/

  • Many groups / individuals try to get their fair share (and much more9 of the so called rescue packages:
    start ups: historically these fail very often even if economic conditions are perfect, have a look at Maschmayer @ linkedin, giving them loans (very limited upside for the lender when they survive and potentially multiply their value, but serious (high) chance of losses as downside) is kind of wierd. Back in 2009 everybody was crying “moral hazard” concerning banks
    overleveraged companies: as you mentioned leoni, there are many more –> moral hazard^2
    big corporations (DAX30), there should be mostly other possibilities to fund these companies in the private sector, but nowadays the government knows one recipe: more public debt! if that leads to a problem –> more public debt!
    (from Germany for everyone: companies and other countries (even if their citizens (italiens) might have more private wealth than germans on average, but not for our own infrastructure, which could still be there after the EUR-era…)
    I find these developments very concerning!

    Happy investing!

  • “However I have never heard the argument that many of the Covid-19 related bancruptcies would have happened anyway.”

    Love that one. Thanks for your thoughts!

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