Leverage, Where is Thy Sting

Leverage, Where is Thy Sting

Coronavirus is changing the world. Right now, Italy is in shut down, and Europe is heading that way. In the U.S., the states, organizations, and companies are leading and closing schools and universities, canceling or deferring events, and implementing work from home policies. What will the impact be?

Who knows. I believe that the current reported number of cases of 2,174 in the U.S. is far below the actual number as testing has failed. Until testing gets on track and we can see where the virus is, then only can we manage it. As those in business know, Measure What Matters, and if you can’t measure it, you can’t fix it.

Again, I expect that parts of the U.S. or all of it will end up with some form of Italian solution to the virus. If you are not sure what that looks like, I will refer you to Italy’s Nightmare Offers a Chilling Preview of What’s Coming. The effect of that will be devastating for many companies and individuals in the U.S. as revenues and income plummet.

However, once more, the financial industry’s offer of a helping noose will exacerbate the problem. Private Equity has acquired an enormous number of companies in the U.S. over the last two decades. To get the returns that their investors are looking for, they leverage the businesses, often with negative results. Today, however, I expect that the damage to these companies from a slowing economy will put many in breach of their loan covenants. Thus it could lead to a dramatic increase in bankruptcies across the country. These bankruptcies will be a negative feedback loop on an already suffering economy and one that the country will be hard-pressed to handle. Thus I would expect the bail-out requests already forming.

Last year, larger non-finance corporations had a record of $13.5 trillion of outstanding debt, according to an OECD report. A growing portion of that is in the form of riskier bonds, and experts worry an economic crisis spurred by coronavirus could send corporations on cost-cutting sprees or to default. Since the financial crisis, corporations loaded up on debt. According to a Morgan Stanley analyst, currently, estimated one-in-six U.S. companies don’t have the cash flow to cover interest payments. In the last decade, about one-fifth of new bonds issued were below investment-grade.

Investors are shedding riskier assets as they realize the impact of the coronavirus. Energy companies have about $88 billion in bonds due this year, and analysts expect defaults to surpass 2016 levels. Rating agencies are watching particularly vulnerable industries like auto, airlines, and hospitality. S&P put Nashville’s Ryman Hospitality Properties on a credit rating watch after massive cancellations threatened to whack revenue by $40 million.

The Administration’s 2017 tax cuts helped many U.S. companies improve their cash positions; however, companies wasted this largess on the typical “Sugar Highs” of companies – share buyback and increased distributions to private Equity. The result of this is that most of these companies are in no better shape to handle a server downturn than they were before.

As Hemingway said, “How did you go bankrupt?” “Two ways. Gradually, then suddenly.”

Leverage is lovely until it isn’t. The fall out from this will be bigger than expected.


Copyright (c) 2020, Marc A. Borrelli

A letter to my Vistage Groups

A letter to my Vistage Groups

I have just sent the following to my Vistage members; however, I think all could benefit from it.


Hi all,

The Coronavirus situation is changing by the minute. While I sent out what I would like to do at our meeting, I wanted to give you my thoughts on what is needed now.


The Situation

The real situation in the US is unknown due to the lack of testing. At present, we have done about 14k tests, and we have 1,700 cases. What this tells me is that the situation is far worse, and the actual number of cases is far higher. As much as I hate to say it, right now, nothing from the Administration is believable as everything coming out of it is either misleading or evasive. I would listen to Dr. Anthony Fauci of NIH or any other credible public health officials as it pertains to the virus. Concerning the economy, look at the bond market. As a result of the Administration’s behavior, states are taking matters into their own hands as we have seen, and saw with Georgia yesterday.



This is a time of crisis, and as the leader of the organization, you need to step up and lead. As I said in my newsletter last week, leadership is hard, and it is about those you lead! First, your employees are scared – they don’t know what is happening or how vulnerable they are. I was grocery shopping yesterday, and not only are they out of toilet paper and hand sanitizer, but all the ramen noodles were gone, and so were the beans (all types). So you need to reassure them. That, in my opinion, is being honest – do not lie or minimize the situation, you will lose all credibility but be confident, what the potential impact is on your organization, what steps you take to plan and that you will keep them updated. Also, look for their input for suggestions, you are all in this together. For an excellent example, read Winston Churchill’s speech to the House of Commons, June 4, 1940, after Dunkirk.


Have a Plan

Now is the time to plan. You need to determine what you will do at each stage now. At what point do I cut various costs, people, stop operations, etc. It is easier to plan before the full panic hits. Work with your leadership team to think this through. The other members of your Vistage Group and I are always here to help, just reach out!


The Impact on You

Given how far behind we are, I expect within two weeks, we could see an Italian solution imposed. If that is the case, I would suggest you read this article to understand what is the implication. Regardless, the economic impact is going to be significant. Things to consider:

  • Work From Home policies, while we may be able to work from home, we need to consider if our clients and suppliers can Work From Home. If they can’t, you won’t be able to work for customers or get what you need from suppliers.

  • Cancellation of events. What impact does this have on you? How does it affect your clients and suppliers? Can you create virtual events for your customers?

  • Cash. How much do you have, how big is your line, and what is your burn rate. What can you do to reduce the burn rate without affecting quality and delivery?

  • Communication. I have talked above about communication with your employees. However, I would communicate with clients and bankers as both hate surprises. With clients, look to see how you can work with them through this and be proactive. Everyone is going to be reducing costs as the economic toll hits. If your customer doesn’t know you or understand the value you bring, you are out.

  • Private Equity (PEGs). Since the 2008 crash private equity has acquired an enormous number of companies in the US, many of these are now your customers. However, as we know and I have written about, PEGs have leveraged all these companies to increase their returns. With a substantial downturn, many of these will not be able to meet their bank covenants, and many may file for bankruptcy. Many of the larger PEG owned companies and public companies have taken on large amounts of junk bond debt and may not survive. Look at your client base and see what vulnerabilities you have.

  • Oil States. The current oil price of WTI Crude is $31.80 which is way below what is required for the fracking industry to be profitable. Given the high capital needs of the fracking industry, I think this is over. For regular oil companies, the price is too low to be profitable for many wells and they will be capped. Thus, oil companies are suffering, so economic pain is coming to all oil field support companies. This will affect all local industries and communities. Thus, if you have clients in Texas, Oklahoma, New Mexico or North Dakota, you may want to consider how stable they are.

  • Small companies. Many small companies may not survive this downturn due to a lack of cash. Look at your client and suppliers to see where vulnerabilities lie.

  • Financing. Hopefully, you aren’t relying on any soon, as I think the market will dry up as everyone waits to see the fallout. Like I said, keep in touch with your banker and don’t surprise them.

  • M&A. I think we can expect M&A activity to fall significantly this year. If that is in your plan as a seller, I would plan alternative scenarios. If you are looking to acquire, there may be some great bargains if you have cash.

  • Supply chains. While we all know of the issues from China, Europe is now shutting down. Understand those effects on your company. Further, the Administration’s ban on European visitors will cause air passenger traffic to fall significantly. As a result, I see the passenger airlines curtailing flights. The effect is that 70% of all trade cargo comes in passenger aircraft. So even if your supplier/customer is operating, the transport of products will be difficult.

I have been talking with a lot of you over the week. As your chair, I am here 24/7 to talk through any ideas you have, or just to listen if you need someone to talk to. It is going to hard, and it is very hard at the top! You can reach me on my cell or by video conference. In any event, I plan to be calling you all regularly to check-in.

Finally, apologies if this ruined your weekend, but better to be prepared than reactionary.

Kind regards,


Copyright (c) 2020, Marc A. Borrelli

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