Fans of trendy Modern Monetary Theory will tell you that governments can’t run out of money because they can always print more to pay the interest on their debts. Unfortunately for Britain’s De La Rue Plc, this controversial idea doesn’t apply to companies whose business is actually printing cash.
De La Rue’s shares lost more than one-fifth of their already depressed value on Tuesday after the world’s biggest commercial banknote printer scrapped its dividend and warned of material uncertainty about its ability to continue as a going concern. In simple terms, there’s a theoretical risk that the banks to whom De La Rue owes money will pull the plug.
Following the recent departure of its chief executive officer, chairman and other top managers, such a warning will probably unsettle key government and commercial customers. Besides printing currency, De La Rue is involved in other sensitive activities including passport production and anti-counterfeit authentication labels. New CEO Clive Vacher has experience in turning around businesses but few are as challenged as this one.
For people who transact almost entirely via contactless cards and Apple Pay, De La Rue’s fall from grace must seem preordained; currency printing accounts for the bulk of its revenues. But global demand for banknotes hasn’t yet fallen off a cliff, even if the shift to a “cashless society” is a long-term problem for De La Rue and its ilk.
The immediate problem is that a glut of currency printing capacity has put downward pressure on sales and prices. State-owned printers are handling more of this work too, rather than using contractors like De La Rue.
Added to this is a litany of home-made problems. In 2018 De La Rue lost a lucrative contract to produce Britain’s blue post-Brexit passports to a French rival. A contract to produce money for the Venezuelan central bank – in theory a money-spinner during a time of hyperinflation – became a loss-maker when sanctions forced the company to write off a large receivable. Meanwhile, the Serious Fraud Office has opened an investigation into suspected corruption by De La Rue in South Sudan.
De La Rue still has some promising business lines: Authentification revenues increased 70% year-on-year, albeit from a small base. However, the succession of management departures and restructuring efforts have contributed to the poor performance and have doubtless undermined staff morale.
Vacher’s priority must be to cut costs to conserve cash. Scrapping 25 million pounds ($32 million) of yearly dividend payments is painful — it provided a support to the share price — but it’s necessary given the deteriorating financial position. Restructuring costs, pension expenses and unavoidable capital expenditure will remain impediments.
De La Rue’s 171 million pounds of net debt now exceeds its market capitalization, which has shrunk by about 80% since 2017. The covenants on its 275 million-pound bank overdraft facility, which expires at the end of 2021, require that net debt doesn’t exceed three times a measure of cash earnings. De La Rue came uncomfortably close to this at the end of September.
More than 40 million pounds of proceeds from a recent asset sale have provided a little relief but the board acknowledges “plausible downside scenarios” that might yet cause it to breach the covenant. A money printer that runs out of money seems paradoxical, but it’s plausible.