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The greatest example of disruption in modern times – COVID-19 – has shaken many companies to their core, demanding immediate action to secure survival and build the best possible platform for recovery and a return to growth post-pandemic.
From a financing perspective, numerous programs around the world have put debt first and not equity. It was a quick fix - a band aid - but now many companies suffer high debt burdens and are potentially overleveraged, with much reduced or even no access to the capital markets right now.
I wrote earlier that I had been surprised that the concept of “equity” has not played a more prominent role in the construction of support packages globally - to provide additional company stability, increasing capital position and opening up greater potential for refinancing.
For many of us, equity may first and foremost describe a situation in which individuals are treated fairly and equally, while others immediately think about the capital on a balance sheet of a company. Regardless of which meaning comes to mind first, they both could play an important role in the recovery of the economy after COVID-19.
“Public debt & equity swaps” of funds provided by governments
Global government financing programs have involved the creation of new structures to hold these instruments, with existing similar ones also used. As a result, there is a significant risk that those entities become long-term state-run capital providers, which has seen limited success in the past, and brings with it risks in certain jurisdictions surrounding anti-trust and hindering the progress of private businesses.
To avoid significant control by government-run entities, could the debt and/or equity be “cut” and distributed into many pieces, distributed to the inhabitants of the respective country (or at an EU / US state level) to allow individual participation in the upside, as well as democratizing control of these funds? Such a "public debt and equity swap" could also enhance acceptance for support programs by citizens, with a more collective outlook to driving national economies out of uncertain times and towards a return to growth.
Upgraded mezzanine programs
While many company owners are more than willing and able to make further large investments in their companies to kick-start recovery, they are limited or completely precluded in some jurisdictions from doing this without their debt being positioned as the most exposed on the balance sheet, should restructuring fail.
Should governments consider additional flexibility in creating frameworks where this money, injected in such challenging times, is prioritised (or at least has parity with) other instruments, regardless of this particular source of funding?
High debt burdens and overleveraged status due to emergency COVID financing could, in a worst-case scenario, restrict access to financing in the future due to deteriorating credit metrics and restructuring measures required in the months to come. Would more support for owners avoid more business collapses and create a more positive economic outlook for the near future?
You can read my additional “equitable” options as food for thought here.