When COVID-19 hit Australia in 2020, there were widespread fears about the economic impact of the health crisis, with a predicted avalanche of insolvencies. Many of us greeted 2021 with optimism, hoping for the world to open up as we adjusted to the ‘new normal’. Instead, the virulent Delta strain and snap state lockdowns are keeping the country on edge. While the health crisis continues, the economic crash has been largely avoided. Partners from our national Turnaround & Corporate Renewal team examine the economic landscape and offer their predictions for the year ahead.
It is a tale of two COVIDs, with stark differences between winners and losers. Generally, the effects of financial shocks (such as the GFC) are spread evenly. But, not for the first time, COVID-19 has shown us that history is no indicator of how pandemics will behave. Its economic effects have been unequal, creating clear winners and losers. For every café, restaurant or hotel that has been decimated, there has been a booming retail or transport business experiencing record profits. While the health crisis continues to challenge, the economic crisis seems to have been averted, despite the continuing uncertainty of snap lockdowns and state border closures.
KPMG Restructuring figures show that insolvency appointments continue to lag well below historic pre-COVID averages with 431 appointments in May 2021. However, they are tracking in line with COVID 2020 numbers (429 appointments in May 2020).
In Victoria, which was subjected to one of the longest and strictest lockdowns in the world, ASIC data showed that 970 companies registered in Victoria had liquidators or administrators appointed in the 2020-21 financial year, compared with 1405 for the previous financial year.
Partners from our Turnaround & Corporate Renewal group – Scott Butler in Brisbane, Mark Petrucco in Sydney, David Dickens and Katherine Payne in Melbourne, and Hector West in Perth – all agree that the market is currently where they expected it to be, despite the tumultuous events of the past year. The predicted wave of insolvencies has not eventuated and the economy has held up, largely because of government assistance and the decision by the banks and the Australian Taxation Office (ATO) to not pursue debt.
What kept the economy humming?
Scott Butler says government assistance, such as a moratorium on insolvent trading, increases to the minimum amount necessary to serve a company, and the time to comply, with a statutory demand, tenants protected from eviction by landlords, and JobKeeper, has left the majority of Australian businesses in a better position than they were pre-COVID.
‘Credit managers are saying the average age of debts owed by customers are the lowest in living record. The ATO says collectable debt has reduced by over $14 billion,’ says Scott. ‘People are paying their bills and paying down tax liabilities and they’ve done it in a period where the ATO isn’t chasing tax liabilities. The banks report that many customers have a lot of cash in deposit. Of course there are exceptions, but many companies on average are in a better financial situation than they were pre-COVID.’
David Dickens says one side effect of government stimulus is that it has delayed the inevitable for some failing companies, or allowed so-called ‘zombie companies’ to continue operating. The writing may be on the wall for these companies over the next year.
‘We’ve had seven months now where businesses haven’t had a lot of government stimulus. There will be businesses still impacted by COVID-19 who are using their cash reserves to keep trading but these will be dwindling,’ says Scott. ‘We expect at some point in the next six to 12 months that, unless things markedly improve, they will run out of cash.’
‘We are seeing pockets of activity but there certainly has not been the avalanche of insolvencies that some people were talking about in 2020,’ says David. ‘The first restructuring and insolvency that I saw in 2021 were companies that had been distressed prior to COVID-19 but were able to survive throughout 2020 because of the government support and moratoriums.’
‘COVID-19 brings winners and losers,’ says Katherine Payne. ‘Many companies that were already having difficulties have been able to survive on stimulus, but are now considering whether they can trade back to profitability or whether they need to close their doors. We are seeing a significant rise in new companies being registered, which raises concerns about potential phoenixing. Consumer confidence is down 1.2% and wage growth is slow. These factors can make it difficult for some businesses, particularly in hospitality, arts and recreation and tourism.
'That said, many businesses are having the strongest period that they have ever had, particularly in retail, transport and construction. There is a lot of cash floating in the market, with companies using the stimulus to pay down their trade creditors. Those that are doing well will only improve as market confidence regains. Demand is high: the issue is more likely to be whether supply is available, with international manufacturing and shipping delays restricting companies’ ability to service that demand.’
Sectors: winners and losers
Some sector observations
Hospitality that relies heavily on foot traffic, such as CBD cafes and restaurants, suffers the most from lockdowns.
‘A lot of suburban hospitality places recover swiftly from a lockdown because people flood out as soon as they can,’ says Katherine. ‘But CBD venues that rely on office workers and international students, like they do in Melbourne, are hurting.’
However, Hector West says Perth CBD restaurants have the opposite problem: ‘You need to book for restaurants in the CBD or you won’t get in. It’s a bit more regimented – for example, many now only offer two-hour windows for a booking.'
Retail has tended to be a mixed bag. Some retailers are booming; others have shut their doors forever. Brands that rely on a store presence for sales have suffered, as online sales have soared. It also depends on the product as to whether demand has increased or not.
‘Anything that sells well online, particularly those things that people purchase to make themselves feel better or improve their homes, such as homewares, white goods, casual clothing, exercise gear, make up, alcohol and home delivery food have all done extremely well,’ says Scott. Other winners have been groceries, home entertainment, pets, hardware and furniture.
In WA, Hector says resources, agriculture and construction have generally travelled well. ‘During any time of economic uncertainty, anything that’s tangible does well. Investors go to safe investments, like gold or gold mining related investments, platinum, silver, property, land, or investing in government or corporate bond market.’
How have lockdowns affected market sentiment?
At the time of writing, nearly 12 million people in Australia’s two most populous states, NSW and Victoria, were in extended lockdowns. South Australia also announced a week-long lockdown, effective from 20 July. Although Prime Minister Scott Morrison recently flagged a four-stage plan to get Australia ‘back to normal’, including using lockdowns as a last resort, the plan hinges on the success of a vaccine rollout. Until then, lockdowns and border closures are likely to remain with us.
David says the recent lockdowns have taken some of the optimism out of the market.
‘People are concerned now about long-term damage. While the whole world was going through lockdowns, we were all in the same boat. But now there are differences and it could have an impact on services that we export, like education. If you were an international student looking to study in either Australia or England, where would you choose? There might become a world question mark over doing business in Australia.’
‘There is a great deal of frustration in the community in Sydney,’ says Mark Petrucco. ‘It’s the uncertainty and the mixed messages that are causing angst. The economy is treading water as opposed to a collapse. But the state government is trying to fast track infrastructure projects, to keep the economy moving, and they should be applauded for that, to the extent that the public’s health is not put at risk.’
Scott says the longer lockdowns go on, the more difficult it will be for average small businesses to survive.
‘The constant uncertainty and lockdowns will have to catch up with people in time. It is impacting on business planning. Do you make a major investment decision when you don’t know how long lockdowns will go for? Given Queensland’s heavy reliance on interstate tourism, a lockdown in Victoria or NSW impacts almost as much as a Queensland lockdown.’
But Hector says it is a different story in Western Australia.
‘If lockdowns have impacted, it’s not visible. The residential property for sales and rentals in Perth is doing very well, unless you are a prospective tenant. Mining has bounced back and agriculture has financially held up our state's economy,’ he said.
The partners all agree that there will be increased insolvency activity over the next 12 to 18 months but it will be a slow increase, rather than an avalanche. Most of the temporary government measures introduced in 2020 have ended. Two permanent changes are the statutory demand regime has returned to 21 business days but the threshold has increased from $2000 to $4000, and a new small business restructuring and liquidation regime has also been introduced, with a $1 million maximum threshold for company debt. But it is not expected that these reforms will have a major impact.
What will drive an increase in insolvencies is when the ATO starts enforcing debt. It was expected that this was about to start happening but the recent lockdowns in Victoria and NSW, both of which have been extended, may have delayed this.
‘The ATO was starting to look at moving and taking what we know as their preliminary steps before enforcement stage but that was before the last Victorian lockdown,’ says Katherine.
‘Once the ATO and the banks start to call in loans, then there will be an increase in insolvency and restructuring work,’ says Mark. ‘The big four banks are sitting comfortably, with a lot of their loans secured over property. Property continues to increase in value, so they have a buffer. Second tier or caveat lenders might be in a more vulnerable position.’
‘There is a likely increase in corporate insolvencies but it will not be over the cliff that was predicted,’ says Hector. ‘Business has had a lot of time to rearrange and restructure their affairs and get their house in order.’
Scott says supply chain will also become a major issue, with huge challenges of getting supply in from overseas. This will impact many different sectors in the economy.
‘Not only are there supply chain restrictions but even if you can get it into the country, it will cost you a lot more in freight. Shipping container costs are through the roof and the new restrictions on flight arrivals will have an impact on freight. Some examples are that the building sector is finding it difficult to get timber and products in, cars aren’t coming in, you can’t get bike frames or components for bikes. This issue will become more serious and will gradually squeeze some businesses.’
The key message our partners offer to clients who are struggling financially is to get professional help early and ensure that you appoint a reputable advisor with a good track record.
‘If you are in a distressed situation, get help and get it early because your chances of surviving and being able to turn around are vastly increased,’ says Scott.
While the insolvency industry remains quiet, many corporates have enjoyed their best period for years and will be looking to capitalise as the world adjusts to ‘COVID normal’.
‘The stimulus into the market has enabled a lot of corporate clients to have their best period in years,’ says Katherine. ‘There is significant cost reduction, with lower travel expenses or opportunity to hand back office space. For many corporate clients, their biggest focus is looking at how to adjust to the new normal with more flexible working practices and embed the positives that have come out of COVID into organisational practices.’