Costa, Downer, Link, G8 face debt stress: UBS

UBS has named the Costa group, G8 Education, Downer and Link Group as firms under threat of debt stress.

TAFE NSW student Carol Mortensen picks blueberry samples at Costa Group's operations at Tolga.

Fruit and vegetable group Costa, childcare provider G8 Education, services company Downer and superannuation fund administrator Link Group have been named by investment bank UBS as some of the companies under threat of debt stress amid the coronavirus pandemic.

In a note to clients on Wednesday, UBS analyst Paul Winter also said the companies most at risk of banking calling in their loans, based on the Merton model which estimates probability of default by comparing a company’s value to the face value of its debt, included travel booking firm Webject, chemicals company Nufarm, outdoor advertising group oOh! Media, Mayne Pharma and mining services contractor NRW Holdings.

By measuring the current ratio of S&P/ASX 300 companies — a measurement of liquidity that looks at a company’s ability to pay short-term obligations or those due within one year — Mr Winter found aged care operator Estia Health, Qantas Airways, Tabcorp Holdings, G8 Education and Incetec Pivot were the most likely to need more capital if operating environments continue to deteriorate.

“In an environment of heightened economic dislocation, company balance sheets are now back in focus,” Mr Winter said.

“Balance sheet strength is critical right now as companies may suffer significant revenue disruption ahead. Many companies also have large fixed payments, such as leases on property, plant and/or equipment and large non-casual workforces,” UBS analyst Paul Winter

“Even if there is no actual default, the costs associated with financial distress are likely to lead to underperformance,” he said.

On the other side of the equation, the companies that were most able to withstand a temporary but large negative shock to revenue included Magellan Financial Group, milk producer a2 Milk, medical company Nanosonics and wealth manager Netwealth.

“While Australia avoided a recession during the GFC, our economists now expect Australia to enter a technical recession,” Mr Winter said.

Bell Potter analyst Richard Coppleson said investors were currently faced with a situation where it was unknown how many companies “will go bust” and whether the government would support them when they had no cash coming in.

“Companies with cash-flow pressures are being hit, high debt companies are being whacked hard and any small caps that have limited or no revenues are also being hit, even though they may have big cash balances right now,” Mr Coppleson said.

“If this goes on for a lot longer and we get a GFC-type situation then we will be seeing a lot of good companies coming to market to raise cash at heavily discounted levels,” he said.

“This is all a long way off, but given so much uncertainty and the GFC still raw and fresh in our memories, some are happy to exit and not have to take that chance.”

A number of ASX groups in recent days have scrapped plans for capital spending and investment as balance sheets are stretched amid a breakdown in the global economy.

Credit markets have also been swept up in a wave of panic selling as investors dump high-yield corporate debt in junk bond markets out of a fear of a wave of company defaults.

Leveraged companies in the hospitality, education, tourism, retail and aged-care industries are already rushing to restructure borrowings in the face of an unprecedented cashflow squeeze.

The fears of a crunch in cash flow has left bond markets reeling at the same time high-yield energy sector debt is dumped amid a 30 per cent crash in the oil price last week out of fear that risky – borrowers will default on their liabilities.