Wednesday 12 August, 2020

Investors urged to proceed cautiously

Dylan Coke, deputy general manager, Investment Banking and Sales at JN Fund Managers.

Dylan Coke, deputy general manager, Investment Banking and Sales at JN Fund Managers.

Investors are being advised to proceed cautiously prior to buying assets, or indulge in panic selling, amid the coronavirus (COVID-19) pandemic, which has ushered in an unstable economic environment.

Dylan Coke, deputy general manager, Investment Banking and Sales at JN Fund Managers Ltd, said: “This is likely to be a stressful time for retail and institutional investors. Retail investors, who did not previously participate in the market, and were preparing to buy, have now, probably, decided to wait.”

He also pointed out that, “persons who had already invested, on the other hand, may now be suffering a kind of paralysis, finding it easier to do nothing, rather than to buy into a declining market; or sell into a falling market and take losses.”

Coke further noted that “it’s impossible to say how asset prices will perform, but investors should be advised to proceed cautiously; buying assets only after they’ve done careful research; and also avoid panic selling, as markets usually rebound after past crises.”

Giving an assessment of institutional investors, which include pension funds, unit trusts and brokerage houses, Coke stated these investors will remain in ‘risk-off’ mode for the foreseeable future; and will allocate more funds to what they see as safer investments.  

He stated that in previous crises, institutional investors have been fair-minded and accommodating in working with issuers to resolve problems.

“We hope this happens again, as it promotes, not only market stability, but better long-run outcomes for investors,” Coke advised.

The JN Fund Manager deputy general manager also noted that companies with debt maturing in the next year or so, will be closely monitoring their financial performance to determine whether they will have difficulty making interest payments and repaying outstanding principals when they mature.

“Where they anticipate difficulties making interest payments, they will be speaking with their investment bankers to see whether the markets will facilitate amendment of debt terms, such as the postponement of interest payment dates where principal repayment is a challenge; and, they may seek to roll or refinance the debt, or if this is not possible, seek to postpone maturity dates,” he advised.

In addition to assessing whether they can pay interest and principal, Coke stated that companies will be assessing how any decline in their financial performance may affect the financial covenants built into their debt. These covenants include, “contractual promises," which borrowers agree to observe, as a condition of obtaining funding from lenders.

“Covenants may include prescribed leverage, liquidity and loan-to-value ratios; and lenders will want to review these with the help of their lawyers, to ensure that they understand the requirements and have the ability to meet same,” he advised.

Coke also stated that if there is any possibility of not being able to meet covenanted ratios, issuers should quickly inform lenders and advise them about any remedial steps they intend to take.

“It is critical that lenders communicate frequently and effectively with issuers, as this helps to maintain transparency and credibility,” Coke suggested.

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