Commercial Awareness Update – W/C 23rd March 2020

The round-up of the stories that a budding Student Lawyer should be aware of this week. Sign up here to get these updates in your inbox every week.

Laura Ashley goes into administration

Article by Gina Asadi (recent BPP LLM Legal Practice (Solicitors) graduate)

The coronavirus outbreak has claimed its first retailer victim, fashion and furniture chain Laura Ashley, that operates about 153 stores in the UK and employs 2,700 staff. The retailer’s administration does not come as a shock considering Laura Ashley’s declining performance over the last two decades; with late 2018 bringing about 40 store closures.

In early 2020, Laura Ashley reported poor performance and the company’s collapse was on the horizon. The company’s collapse was avoided when Laura Ashley managed to secure a deal with one of its main shareholders and lenders, Wells Fargo. However, with the outbreak of the coronavirus, the company’s sales slowed further and Laura Ashley found itself seeking additional funding. The company’s majority shareholder, MUI Asia, was unable to secure additional financial support in the timeframe required; and as a result, has appointed PwC as administrators to Laura Ashley and its subsidiaries, Premier Home Logistics, Laura Ashley Investments and Texplan Manufacturing. Laura Ashley has released a statement explaining that ‘the Covid-19 outbreak has had an immediate and significant impact on trading’.

Laura Ashley went public in 1985 by listing on the London Stock Exchange; at the time, the company was valued at more than £200 million, however, it is now valued at only £10 million. Due to the appointment of the administrators, the company’s shares fell more than 60% and the shares will now be suspended from trading.

Large retailers are now in fears of collapse as a result of the outbreak and have asked the Government for a suspension of business rates. The Government, in order to prevent further companies collapsing, has announced a £12 billion budget to help businesses survive the crisis. Whether this budget will be enough to help retailers survive this coronavirus outbreak is unclear and many suspect that a large number of businesses will collapse during these difficult times.

Laura Ashley’s administration and other future administrations mean potential work for City law firms. Law firms will be called in to advise both the companies and the administrators on different legal aspects, ranging from restructurings, property and intellectual property matters and methods of financing deals for potential buyers.

You can read more here and here.

Car production halted by COVID-19

Article by Jamie Howarth (LLB Law student at ULaw)

Covid-19 has had significant economic impact in the UK in recent weeks. Supply chain issues have caused may businesses to cease trading, regardless of whether the employees are well enough to work. Car manufacturing in the UK is an industry that has been exposed to this detriment, possibly to a higher extent than any other.

Car firms such as BMW, Toyota, Nissan, and Vauxhall have made the decision to temporarily suspend production in part due to the disruption to the, usually steady, supply of parts. BMW alone produce roughly 500,000 cars a year, so this indefinite pause will have long-term effects on the industry. Only Jaguar Land Rover is yet to suspend production within the UK.

There are also issues further down the supply chain, with a substantial decrease in sales in recent weeks. This has had an impact on the UK because many of the cars produced here are exported to Europe. As people can’t now leave the house, they cannot buy the cars being produced. Not only is this difficult for the firms to navigate, but also for their employees – BMW employs roughly 8,000 staff in the UK, many of which will be out of work for the foreseeable future.

Evidently, these are issues facing many industries in the UK and around the world. It is a problem that is magnified in the car industry, which has seen companies having to invest significantly in low and zero-emission vehicles to remain competitive in the current market. It will be interesting to see how the industry will recover from Covid-19 and everything that comes with it.

You can read more about this issue here and here.

Interest rates slashed to 0.1% – the lowest rate ever

Article by Camilla Uppal (LLB Law graduate – University of Kent)

The Bank of England has cut interest rates to 0.1%, the lowest level in the Bank’s 325-year history.

The unprecedented move was one of the first decisions made by new governor Andrew Bailey after he took over from Mark Carney last week. The new rate is lower than the interest rates used in the aftermath of the financial crash, when interest rates lingered at 0.25% from March 2009 until November 2017.

Cutting interest rates is just one of the measures being used to try to help businesses and individuals cope with the economic damage caused by Covid-19, enabling cheaper borrowing and to stimulate the economy.

The Monetary Policy Committee also voted unanimously to increase the Bank of England’s holdings of UK government bonds and sterling non-financial investment-grade corporate bonds by £200 billion pounds to a total of £645 billion, financed by the issuance of central bank reserves.

The decision by the Bank of England to buy UK government bonds comes at a time that investors are trying to secure more cash – dollars in particular. This means they are ditching assets like UK government bonds (which are like IOU’s the government gives to private investors in exchange for borrowing money) so they can buy more dollars.

As the government bonds are sold, the price drops and the yield – the effective interest rate compared to the price – rises. This  causes a rise in the cost of borrowing to private investors and the government. The Bank of England’s plan to buy £200bn more bonds is aimed at fighting that effect so the government can borrow at a lower cost in this time of crisis.

How low can they go?

Andrew Bailey is currently reluctant to resort to zero or negative interest rates because of their impact of the banking system’s capacity to lend. This is likely to be the reason he has settled at 0.1%. This marks a 0.15% drop rather than the usual half or quarter percentage point change we are used to seeing.

You can read more about the new interest rate here and here.