The impact of corona regimes on corporate finance issues

Article from Brookz

Government support package for entrepreneurs

Tax deferral

A brief refresher on the scheme. Under the scheme, companies can still apply for an extension to pay their taxes until Oct. 1, 2021. The scheme covers corporate income tax, sales tax (VAT) and payroll tax, among others. The amount on which deferred payment has been obtained must be repaid over a period of 5 years from Oct. 1, 2022 (the assumption is that the debt is repaid on a straight-line basis). Recovery interest must be paid on the debt incurred. This interest rate was temporarily reduced to 0.1% per year in 2021, but will increase to the old level of 4% per year during the coming years.

Receivables and payables

When a company is bought, sold or valued, so-called debt and cash like items are adjusted to the enterprise value to arrive at the equity value. Receivables from and payables to the Tax Authorities are normally a part of the net working capital position and, under the condition that the position is appropriate, do not usually classify as debt and cash like items for that reason.

However, since the payment period of the deferral arrangement differs from a normal payment period and, moreover, may involve relatively substantial amounts, buyers or valuers will often include the company's debts to the Tax Authorities insofar as they relate to the corona-related payment arrangement as a debt, resulting in a lower equity value. Thus, when buying, selling or valuing a business, it is important to look carefully at the various receivables from and payables to the Tax Administration and break them down into "going concern" components versus one-time debt-like components.

Cash like item

In addition to the tax deferral scheme, the NOW scheme can also lead to a debt and cash like item. This may be the case when the final calculation under the NOW scheme results in a different grant amount than the advance received. If the amount of the final calculation is lower (or expected to be lower) than the advance received, this leads to a debt item that must be deducted from the enterprise value.

However, the reverse can also occur under this arrangement, namely when the (expected) final calculation exceeds the advance received. This should then result in a "cash like item" to be added to the enterprise value.

Higher credit risk

Debt incurred due to tax deferral or a different calculation under the NOW scheme may also play a role in financing issues. In any case, the repayment and interest payment on the debt to the Tax Office or the UWV will lead to a lower cash flow available for, among other things, investments and the repayment capacity of other debts. In addition, the question is how banks deal with this tax debt when providing (new) financing. Especially in certain sectors where the debt relative to operating income is high.

'The Tax Administration's deferral scheme and the NOW scheme can directly impact equity values'

The corona debt with the IRS or NOW refund will result in higher credit risk for banks and other lenders. The debt will also potentially be included in the calculation of financial covenants. If the credit margin is linked to a financial covenant, this in turn may lead to a higher credit margin. While we do expect banks to be somewhat lenient on this, given the social situation, there is increased risk.

Government support

Another interesting aspect of this arrangement, and more broadly all corona-related aid packages, is the difference of the arrangements between countries. Indeed, there is much variation in the size of aid packages between countries. Rabobank research shows that developed countries in particular have significantly increased government spending by 2020. The countries at the top of the list are the United States, the United Kingdom and Canada. These countries increased their government spending as a percentage of GDP by about 15% between 2019 and 2020.

The Netherlands scores a lot lower with an increase of about 7%. Large differences between the amount of aid companies receive in different countries can affect the competitive position of companies. As an entrepreneur, it is of course difficult to compete when your competitors have received much more government support simply because they are based in another country. A good example of this is Ryanair. They filed lawsuits last year against several national airlines (including KLM) that received billions in aid from their governments while Ryanair did not.

Influence schemes

In conclusion, when buying or selling a business, the Tax Administration's deferral scheme and the NOW scheme should be carefully considered. This is because these schemes can have a direct impact on the value of equity. The schemes should also be taken into account for (existing and new) financing.

Despite the fact that the schemes may provide relief from liquidity problems, there may be a negative impact on (attracting) financing. Finally, the terms of the support packages may differ between countries and this may affect competitiveness between firms.

Source credit: Brookz