COVID-19 Sector Commentary
With the rapid outbreak of COVID-19, the virus presents significant business challenges. Many functions and operational areas are being affected. We analyse how certain sectors will be impacted.
James Aston, Head of Education
COVID-19 is already having a substantial impact on the education sector and in some areas that impact may be felt for years to come. At the end of April the attendance rate among pupils in nurseries and schools in England reached 2.1%. These are the children of key workers and vulnerable children. Around 80% of educational settings were open on 30 April 2020 according to the Department for Education.
Further education colleges and universities remain open. The former by government instruction and the latter mainly through needing to remain open in the students’ interests. This includes providing ongoing accommodation and student services to international and UK students stranded in the UK.
Learning at all levels has shifted rapidly to online with some challenges for students and providers. The exception is GCSE and A levels assessments, which have been put into the hands of teachers. This fundamentally changes recruitment into universities and for apprenticeships and school leaver programmes. There are concerns about grade inflation and ‘clearing’, which many universities rely on, will be delivered differently.
International travel restrictions
International travel restrictions could have a massive impact on the autumn 2020 enrolment of international students, particularly from the USA, China and Europe. The restrictions will primarily affect independent boarding schools and higher education as International students are an important source of income.
World class research takes place in many of the UK’s universities. Social distancing has meant reduced access to laboratories, and teams are not able to collaborate in person. The volume and type of research will change and will no doubt evolve. COVID-19 has also led to a narrowing of focus in medical research and has put on strain on teaching hospitals.
There will be a stalling in the volume of UK-led research and the associated funding but the recovery time should be quick.
Recruitment and online learning
In education, a short term impact rapidly becomes a long term issue that resonates for anything from three to five years. Lower recruitment of international students at Year 7 flows through a school to sixth form. This is compounded financially in higher education where a drop in Year 1 undergraduates has a direct three-year impact. Particularly where non-EU students’ contribution rates are far higher.
Recruitment patterns for autumn 2020 may also alter longer term patterns. International students may choose to stay in their country for 2021, as new options open up. They may also take up new opportunities for online learning as providers worldwide use their current experiences to develop fantastic digital learning experiences.
There are opportunities for new practices and development of online learning in a way, and at a volume, that simply hasn’t been delivered before. Some providers (across all phases of education) will thrive and prosper, others may be more challenged.
Historically, the banks have viewed both higher education and independent schools as reasonably low risk. There will be two main challenges to this perception. Firstly the appetite for the sector will be affected by losses because of providers that default. Secondly, the availability of finance as the banks’ exposure to other sectors increases over the next few months. Capital investment needs are likely to change and business plans that were well grounded are now less predictable.
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Robert Barnard, Partner
As COVID-19 impacts the hotel sector, what support is available for hoteliers?
The hotel sector has already seen mass cancellations across rooms, events and conferences. Hoteliers are closing their doors in a bid to prevent further spread of the virus, and with the outbreak not looking to ease any time soon, many are left wondering what support is out there for their businesses.
The Chancellor recently set out a package of temporary, targeted measures to support businesses through this period of disruption. Some key measures included deferring VAT and income tax payments, 12-month business rates holiday for all hospitality and leisure businesses, grants and loans for many, and workers will have up to 80% of their wage costs covered if they are furloughed, or temporarily sent home. Read more on the support made available.
This is a welcome move by the government and will bring some relief to those struggling to keep up with payments in the hotels sector. However, it is still unclear how quickly and easily these funds will be made available when high demand will be imminent.
Many hotels will be, or are close to, breaching their financial covenants on loan agreements. We believe that businesses should not have to go through the normal covenants test process at this time. Although many lenders have waived their financial covenants for a while, more needs to be done around how it is tested when trading returns to normal. The key issue is when does ‘normal’ return and what is the ramp-up period associated with that? No one has the answers yet but we are here to help with any financial discussions you may be facing.
Looking at insurance policies, these differ from business to business and the government’s advice is to check the terms and conditions of your specific policy and contact your provider. Most hotel businesses are unlikely to be covered, as standard business interruption insurance policies are dependent on damage to property and will exclude pandemics.
On a positive note, it is warming to hear that many of the largest hotel chains are in talks with the government about providing space for the NHS. For example, Best Western, is offering 15,000 hotel bedrooms and over 1,000 meeting rooms to help the NHS and local authorities. A number of other offers have been made such as providing rooms to NHS staff who cannot return to their families due to having close contact with patients and using hotels to house non-coronavirus patients. Another suggestion has been the potential use of hotel cleaning staff to bolster the NHS’s ability to clean hospital facilities. It is great to see hoteliers using their supplies and resources to help those who need it the most.
When it comes to keeping your hotel business up and running you can find useful information on government support for businesses and practical advice on business continuity and resilience on our COVID-19 Hub.
We always do our best to keep clients up to speed with the latest issues and movements of the market, both nationally and internationally. If we can help you in any way, please don’t hesitate to make contact with your local BDO representative. We have extensive resources to meet your operational and financial needs.
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Tom Lawton, Partner and Head of Manufacturing
The manufacturing sector relies heavily on complicated and global supply chains, dependent on countries such as China for core components and parts. We have already seen China’s lockdown, impacting UK manufacturer’s access to these components and now the challenge is very much closer to home.
The last couple of weeks have seen a number of UK manufacturers halt production because of disruptions to supply chains and falling consumer demand but also to protect staff as the rate of infection continues to accelerate.
On the flip side, we are seeing manufacturers being good corporate citizens. Vauxhall and Airbus are switching production to meet the country’s growing demand for ventilators and brewers have switched to producing hand sanitising gel.
The key challenge facing manufacturing will be to ensure they can keep their business going and cash flow is fundamental to this. Cash flow is linked to all elements of the business and each element needs to continue to ensure cash is flowing in both directions. Keys areas of cash flow focus include:
While the package of help for business will evolve over time, the key elements of the current proposals can be found here.
VAT payment holiday – no business will be required to make VAT payment for the next VAT quarter, meaning that no VAT payments will be required from any business until the end of June 2020.
Coronavirus Job Retention Scheme – employers that find it necessary to lay employees off temporarily on furlough can apply to HMRC for a grant to help retain those staff. The grant will cover up to 80% of the employees’ salaries to a maximum of £2,500 per employee per calendar month, which is backdated to 1st March 2020.
Government-backed loans to businesses - a new, temporary Coronavirus Business Interruption Loan Scheme, delivered via the British Business Bank, will support SME businesses to access lending and overdrafts.
Direct business grants – business grants up to £10,000 each to around 700,000 businesses currently eligible for SBRR or Rural Rate.
Supporting the self-employed – making it easier for those not able to work as a result of COVID-19 to claim state benefits.
Tax - Improved Time To Pay arrangements – assisting those struggling to pay their tax liabilities and in financial distress to agree a bespoke Time to Pay agreement with HMRC.
Paying Statutory Sick Pay (SSP) – all employees who self-isolate will be able to claim SSE including those employees who are caring for someone who is self-isolating. Businesses with fewer than 250 employees as at 28 February 2020 will be able to reclaim SSE expenditure up to a maximum of two weeks per employee from the Government.
All manufacturers should rightly be focussed on maintaining the health and wellbeing of their employees. However, the implications of ‘social distancing’ will require specific workforce measures especially for roles that can’t be carried out remotely.
In addition to the current position on Statutory Sick Pay (SSP), it is anticipated that the government will introduce additional financial measures to support employers. Regardless of the government’s measures, manufacturers may like to consider including some PAYE and NIC, managing staff and health costs and we provide some practical points here.
Over the decades manufactures have faced and continue to face challenges and it is their resilience which gets them through these difficult times. We are once again seeing manufacturers stepping up to support the country through various guises but it is imperative they are planning, adopting effective and flexible business continuity arrangements and most importantly focusing on cash flow.
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Motor retailers, like all companies, are starting to get to grips with what is happening; re-orienting their businesses and as a result are starting to feel more on top of things. But the fast-changing situation requires constant re-evaluation.
Obviously, new cars can’t be delivered to customers’ front doors. However, many dealerships now have most of their teams working from home and customer contact has been maintained. Additionally, those with service centres have been do what they can to remain open to work on commercial vehicles as well as those of key workers and vulnerable people who need mobility. This has entailed reducing staff numbers at any one time to ensure social distancing and reduce their exposure to risk.
Sales enquiries and service bookings are still being made albeit at a much-reduced level. Google auto searches are down reflecting that the majority are not at home thinking about buying a car and internet traffic is fluctuating as further government announcements are made.
So, in addition to the measures that all companies can take to access government help retailers should keep close to their lenders and convert current assets into cash, in particular you should be focused on these four areas:
Taking the time to maintain relationships with customers will build trust. This will be time well spent and will reap benefits in the longer term.
Tone of voice
Fundamental to striking the right tone is authenticity. You should park traditional sales skills. Be honest, be real and be helpful. If you can help people at times like this they will remember it in the future. You absolutely cannot ‘sell’ at the moment.
Some large groups have ceased all emails to their database but continue to communicate via social media. They have also ensured their websites have the latest information on dealership closures - leaving it for customers to come to them.
Be sure to have a strategy for responding to customers. Stick to the channel they are using to communicate with you. Get your ‘digital forecourt’ looking as good as you can; take new photos, review your SEO, update local online listings and remember YouTube can be an incredibly powerful marketing tool.
Keep your business up and ready to reopen. However, don’t expect to flip from a more soft touch approach to harder sales - your doors will reopen but customer behaviour may have changed and there will be no hard and fast rules around what works and what doesn’t.
If you haven’t already considered the following options then now is definitely the time to do so:
To date the most publicised funding for business is the Coronavirus Interruption Loan scheme (CBILS). This is only available to businesses with turnover of up to £45m so a large majority of motor groups (including all the Motor 150 population) will not be able to access this.
The next level of funding available is the COVID Corporate Financing facility (CCFF). Our understanding is that this is currently only available for businesses who have a certain credit score rating of A-3 / P-3 / F-3 / R3 from at least one of Standard & Poor’s, Moody’s, Fitch and DBRS Morningstar as at 1 March 2020. However, we understand if you do not have this credit rating but your credit rating meets the required level in your own bank’s rating system then you may be eligible. Therefore dealers should contact their bank to discuss whether this is applicable and available to them.
Time to pay arrangements (PAYE/VAT) - In a time of national emergency, the Government has tasked HMRC to develop its TTP offering as an essential ‘lifeline’ to support cashflow.
Deferring VAT Liabilities - The opportunities include deferring output VAT, accelerating input VAT, making certain claims that haven’t been business critical until now (eg VAT bad debt relief), leaving or joining the payment on account regime and streamlining the monthly VAT return process to speed up repayments.
Outsource tax and accounting functions - where you motor finance team are either ill or away – we can help you by taking on tax or accounting functions such as the VAT return, payroll and submit them on your behalf.
Claiming repayments of overpaid corporation tax for either 2019 or 2020 - This could include repayments of previously paid quarterly instalments, provisional loss carry back claims, revisiting loss claims or submitting claims for reliefs such as Capital allowances and in some cases R&D which haven’t been business critical until now.
Business interruption as a result of COVID-19 – Check your insurance policy terms; in particular if you have standalone cover for, e.g. denial of access, loss of attraction, notifiable disease, act of competent authority, loss of an event? Although the vast majority of businesses would not be covered for business interruption of the type caused by COVID-19, due to discussions with the Government insurers may begin to take a less restrictive approach to coverage.
COVID-19 crisis management planning – Retailers with well thought out and updated plans will certainly be in better shape, however these plans are developed for general disruptions and must be adjusted for the unique circumstances of COVID.
You can speak to business assurance partner, Steve Le Bas, tax partner, Chris Bond or your usual BDO contact to discuss any of the above topics.
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Oil and Gas and Mining
Louise Sayers – Partner and Head of Natural Resources and Energy
The oil price war triggered by the ongoing dispute between Russia and Saudi Arabia and pressures on commodity prices from the global spread of coronavirus are creating an unprecedented international crisis across the natural resources sector; mining as well as oil and gas.
Recent oil prices are hovering around the $20 - $30 per barrel but some oil traders expect prices to start to slowly increase again over the back end of 2020. Oil prices will seemingly continue to sit below the recent historic ‘norms’ of the last few years for some years yet. As a result, global oil and gas exploration and production investments are expected to fall considerably. In addition, staffing and supply shortages for key services and the provision of key equipment may delay the delivery of projects further.
On the other hand, the cancellation of projects due to uncertainty around funding means that companies which are fully funded or have cash on balance sheet may see an opportunity to secure better rates in the services market and bring projects on line under budget.
The gold companies may benefit from an increased commodity price as people look to securitise their funds. The current trend in the gold price had already started to tick back up but commentators are now starting to predict gold prices may rally further.
Miners of coal, battery metals and gemstones are worrying about more than price considerations.
A lot of mines are located in remote, relatively undeveloped areas of the world where medical supplies and access to hospitals are severely limited. Mining can also be a labour intensive business with many workers either coming from local areas or flying in and flying out on shift patterns. With the speed of the spread of the virus many mining companies are taking measures to lock down their operations and increase their onsite medical support. Likewise restrictions on travel are hampering the fly in and fly out of workers and operational changes are already under review.
The capital markets will make up their own mind about the sector in time. They may choose to invest in gold companies to help ride out the storm the oil and gas companies are facing, or they will invest in oil and gas companies in the knowledge that prices have and will always come back up? Either way access to funds for some will become even more of a challenge that it already was.
To mitigate risk factors facing the sector, natural resources companies will need to cut costs, re-forecast capital projects over the shorter term and longer term, implement revisions to logistics, review their contracts for the application of force majeure and supply chain operational provisions.
Many will also need to speak to lenders / debt providers now to deal with marginal or breached covenants – not just in the short term but about the longer term too.
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Neil Stockham, Tax Partner
COVID-19 and retail: Navigating the immediate challenges whilst thinking about longer-term planning
The Chancellor’s package of temporary measures is welcome and will bring some relief to those finding themselves out of work or struggling to survive as payments build up. However, many retailers need immediate access to these resources and it is still unclear how quickly and easily these funds will be made available.
Retail businesses must navigate through the immediate, and sometimes overwhelming, challenges as well as do some longer-term strategic planning to prepare for the future on the ‘other side’ of the crisis. Trading is likely to be radically different from what it is now.
Navigating the immediate challenges
Mitigating the impact of lost income for both consumers and retail businesses and maintaining productivity in the economy will be key foundations for a sustainable, and hopefully swift, recovery.
Retailers are polarised; some, such as food retail are fighting massive short-term demand overload while others are unable to move stock. All retailers are managing unpredictable shocks to their supply chains as borders are closed and various lockdown and ‘social distancing’ measures are imposed by governments. The outcome is often unfulfilled orders.
The closure all shops selling non-essential goods such as clothing and electronic goods for potentially up to three weeks or more, means that high street retailers are asking themselves some difficult questions. Can their online channel sustain the business whilst stores are closed? How do they fund the inevitable costs? What government support packages are available to them and how do they access them?
Our COVID-19 hub provides useful information on government support for businesses.
Although many will welcome the extent of the support provided, most, if not all, retailers still need to pay rent and for stock; so a frank and open dialogue with both landlords and suppliers is now needed together with practical collaboration to achieve sustainable outcomes for all parties.
Thinking about the longer term
Looking to the future, there will be no respite for retailers as Brexit still looms large and a protracted recession could well follow. Careful planning is therefore required with a core focus on cash management and building both robust and resilient supply chains.
Consumer behaviour is already changing. It may become fundamentally different from what it was before. As we are all restricted to staying at home, a vast proportion of consumer spend will now take place online. Increased home delivery and convenience may make this the new norm, even for those more traditional consumers who previously preferred the high street.
Many retailers currently (over)rely on a few key suppliers, particularly from the Far East. This may well have to change. As retailers emerge from the COVID-19 outbreak, there will be a new focus on agile and resilient supply chains. This could lead to further on-shoring of manufacturing to enable quick responses to changes in demand to shorten lead times on stock supplies. We may also see a further rise in the environmental sustainability, as retailers push to become carbon natural and move to a more circular economy. Our 2020 Retail Forecasts Report explores this in more detail.
Technology will also become critical in building both resilience and agility. We are likely to see an increase in automation and use of AI. This will lead to fewer people roles and those will be limited to where they can add real value in the supply chain.
There are some big decisions ahead for retailers both in the short term and long term. Those that can survive and adapt their business model may create a more resilient platform for opportunities in the future.
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Restaurants and Bars
Mark Edwards, Partner
Last orders: As the government announces closure of all UK pubs and restaurants, what support is now available to these businesses?
All pubs, clubs and restaurants have closed in the UK following the government’s announcement to prevent further spread of the COVID-19 virus. Many are now left wondering what support is out there for their businesses.
The Chancellor’s package of temporary, targeted measures to support businesses includes deferring VAT and Income Tax payments, 12-month business rates holiday for all hospitality and leisure businesses as well as grants and loans for many. Workers will have 80% of their wage costs covered if they are furloughed, or temporarily sent home.
This will bring some relief to those finding themselves out of work or struggling to keep up with payments in the restaurants and bars sector. However, it is still unclear how quickly and easily these funds will be available when high demand will be imminent. There is also greater clarity required on how the calculations will be made for holiday pay and the taxes payable on the wages of those furloughed. Read more on the support made available.
Looking more closely at the support of wages, it is great to see that hospitality business are front in line to receive support. However, the exact nature of “reimbursing” is unclear – the government’s own website is currently a little contradictory as to whether employees will receive a “top up” to 100% pay from their employers or not. And it’s not just wages - PAYE and NIC is still a big question too. Do businesses need to ask for time to pay on this and how will all the schemes work practically and interlink with the other measures such as deferred income tax payments? As mentioned above, we are keen to see how this works practically.
Also, previously restaurants and bars closed operators were on the hook for rents to landlords, with the quarter rent recently due on 25 March. Thankfully, the government has confirmed it has extended the moratorium on lease forfeiture and debt enforcement to commercial tenants.
What is warming to see is many restaurants and bars businesses using this situation in a positive light to support others. For example Itsu, which was completely shut down, has donated £15,000 worth of freshly made food to NHS workers; BrewDog has used its production line to create and deliver hand sanitisers and many investors have invested funds into restaurant takeaway models.
We know that it is a challenge to keep your restaurants and bars up and running. You can find more detailed information on government support for businesses and a range of other practical advice on our COVID-19 Hub.
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Mike Simms – Partner & Head of Shipping
Shipping is a global industry and it relies on the safe passage of ships, seafarers and cargoes around the world. As COVID-19 escalates globally, shipping market intelligence is predicting a general downgrading of growth forecasts across individual shipping sectors and a weaker global GDP economic outlook. This is likely to impact shipping markets and put further pressure on shipping companies.
The impact so far has been on everyday operational issues including: restriction on seafarer changes and their wellbeing, restriction on vessel port calls, dry-docking delays, extended lay-ups, delay in the delivery of ships and the activation of contractual clauses. This has extended to major disruption to scheduling or suspension of services for ferry and cruise line operators and the question of when there will be a return of consumer confidence, which may impact future bookings for a longer period of time.
The recent oil price collapse has reduced fuel costs and has highlighted the narrowing spread between HSFO and LSFO, reducing premiums for eco or scrubber fitted vessels. It is difficult to predict the future spread due to the volatility in global oil supply and demand. Shipping companies who have committed to the installation of scrubbers are having to re-evaluate their earlier investment return scenarios.
The volatility in the spot price of oil has meant that it has turned “contango”, which means that the spot price of physical oil has been at a significant discount compared to the future price. The impact of this seems be to that VLCCs have been used to store oil and it has significantly increased tanker charter rates. This may be short lived but there is tremendous volatility in the market at the moment. The decrease in the oil price will surely have a sharp negative impact on sentiment in the offshore markets.
The shipping industry has faced adversity for a number of years since the global financial crisis but the current circumstances will test their resilience even more than before. Supply chain interruption poses a huge challenge for many UK businesses and their management teams. If COVID-19 causes reduced economic activity in multiple sectors of the shipping industry and tips global economies into recession, the challenge will become even greater. Shipping companies need to build resilience and put in place appropriate contingency plans. Keeping a close eye on current and future cash flows and maintaining close contact with stakeholders are two key requirements for navigating through these uncertain times.
In addition to the UK Government’s announcement to provide assistance to UK businesses, it has also provided helpful guidance on the strategic management test relating to tonnage tax applicable to UK ship owners. In order to qualify for the UK tonnage tax regime, a company must both strategically and commercially manage its ships in the UK. If decisions have to be made by an international group at group level and not at UK board meetings as a result of COVID-19, HMRC has indicated that this will not mean that the UK companies fail the strategic management test.
1. A general downgrading of growth forecasts across individual shipping sectors caused by the COVID-19 disruption around the world and a weaker global GDP economic outlook.
1. The oil price collapse has reduced fuel costs and has highlighted the narrowing spread between HSFO and LSFO, reducing premiums for eco or scrubber fitted vessels. It is difficult to predict the future spread due to volatility in the global oil supply and demand. Whilst there has been a notable spike in tanker rates in recent weeks this may be short lived.
2. Operational issues persist in what is a global industry, including: crew changes, port calls, dry-docking delays, lay-ups, delivery of ships and the activation of contractual clauses.
2. There has been a sharp negative impact on sentiment in the offshore markets from the oil price collapse.
3. Major disruption to scheduling or suspension of services for ferry and cruise line operators and the question of when there will be a return of consumer confidence, which may impact future bookings for a longer period of time.
3. Supply chain interruption poses a challenge for many UK businesses and their management teams. If the Coronavirus causes reduced economic activity in multiple sectors of the shipping industry and tips global economies into recession, the challenge will become even greater. Shipping companies need to build resilience and put in place appropriate contingency plans. Keeping a close eye on current and future cash flows and maintaining close contact with stakeholders are two key requirements for navigating through these uncertain times.
4. The UK Government has provided helpful guidance on the strategic management test relating to tonnage tax applicable to UK ship owners. In order to qualify for the UK tonnage tax regime, a company must both strategically and commercially manage its ships in the UK. If decisions have to be made by an international group at group level and not at UK board meetings as a result of COVID-19, HMRC has indicated that this will not mean that the UK companies fail the strategic management test.
Ian Clayden, Partner
As COVID-19 causes postponements and cancellations to professional sports fixtures, what support is available for professional sports businesses?
COVID-19 has put sporting schedules on hold and affected some of this year’s biggest events. The Tokyo Olympics is the latest event to be postponed. It joins the long list of postponed sporting fixtures. Premier League and Football League, Euro 2020, the Masters Golf, Six Nations Rugby, Wimbledon and Formula 1.
Sport is big business and the economic implications are being felt across the board. As well as buying tickets and attending events, globally fans buy around $27.8bn of sports merchandise annually. Clubs and operators rely on media rights incomes that in turn are dependent on TV and online subscriptions, as well as subscriptions from other leisure operators including pubs and bars, to air matches to their paying customers.
The global audience for the English Premier League was c4.7bn in 212 countries last season and it is well publicised that the TV rights for Premier League matches are currently worth c£3.1bn a season.
With global sports sponsorship estimated to be worth $55bn, catering and hospitality suspended until sporting venues open, and many betting shops and online gambling sites not being able to pull in revenue from sports betting, there has been, and will be, a domino effect on those who operate in, support and benefit from the professional sports sector.
In the short term, broadcasters and rights holders will, to some extent, suffer a loss of revenues from advertising and subscription. Sky UK recently announced it will suspend payments for its subscribers for its 11 sports channels. However, the question remains open as to whether media channels will look to claw back payments made to professional sports.
For the many thousands employed in the sector, and for their employers, the recent government package of support for furloughed workers may provide some temporary relief. Employees will have 80% of their wage costs covered if they are furloughed and not performing work for their employers, up to a maximum of £2,500 a month.
Cash flows of many sporting operations are typically relatively predictable. They are used to predicting, forecasting, reporting, contingency planning and operating to a relatively small margin of error better than many other businesses. So, for sports businesses, it is critical that they react quickly and responsibly, take advantage of Government support packages and prepare for the reopening of unfulfilled fixtures. Certainly, with current curfews in place, there is high demand for televised sport whether that be with a live audience or behind closed doors!
During this time the UK Government has also announced a range of other measures to support businesses that sports businesses should use. Banks are generally reported as being considerate to pressures on financial covenants caused by loss of income and deterioration in asset values.
When it comes to keeping your sport business up and running, you will find lots of practical advice and useful information on our COVID-19 Hub.
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Phil Cliftlands, Head of Not for Profit
Housing associations support and look after many of the most vulnerable people in society. Unlike some business areas where activities can be wholly suspended or provided remotely, the sector has faced unique financial and operational challenges in maintaining vital services.
Emerging financial challenges
I have found it heartening to see the positive ways in which housing associations across the country have supported high-risk and vulnerable residents during lockdown as well as supporting those in financial difficulty. However many associations are now having to make difficult financial decisions in order to minimise the impacts of rising arrears and the slowdowns to their development and property sales pipelines.
Housing associations are predominantly debt backed and are relatively highly geared. There will need to be a focus on financial sustainability, boosting liquidity and dialogue with lenders over the impact on financial covenants in place.
In particular, for March year ends, it is likely that property valuations will fall, pensions liabilities will rise and financial instrument mark to market liabilities will also increase. Together these areas could significantly impact balance sheet capacity and covenants.
We have produced some guidance in the form of an article and webinar on the audit and reporting implications of COVID-19, as well as an article and webinar which explore the emerging tax implications.
Emerging operational challenges
The main challenge has been that social distancing has created barriers to completing repairs and maintenance where access to a resident’s home is necessary, particularly with regards to gas servicing. We have also noted some contractor capacity issues. In the second monthly survey, organised by the Regulator of Social Housing, figures indicated a decrease in overall gas compliance. In cases of overdue gas compliance, or other compliance matters, landlords will need to demonstrate and evidence that reasonable steps to achieve compliance have been taken.
New ways of working have meant that processes have needed to be quickly adapted to ensure core services continue. However new processes also need to be resilient and legally compliant. With Allocations and Lettings, Human Resources and Accounts Payable functions being conducted remotely there is a wide range of resident, staff and supplier confidential data increasingly circulating in unfamiliar ways.
BDO’s COVID-19 Hub contains a wide range of resources to support housing associations including information on government support, supply chain management, IT and data protection, and business impact and continuity.
Rethinking key risks
With a change to rent setting this year and the regulator’s ever-present focus on data integrity and landlord compliance, it’s clear that the business-as-usual risks will have to be balanced with those emerging from COVID-19.
We will soon be gathering information for the 2020 edition of our Social Housing Barometer – it will be interesting to see how housing associations rethink their key risks and focus their attentions over the coming months.
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