With Kate Ritchie, Boardroom Radio
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We all know there's a mining boom in Western Australia, but many would be surprised to know there's also been a dramatic rise in insolvencies. Cameron Belyea talks to Boardroom Radio about the factors driving this.
Today Boardroom Radio speaks with Cameron Belyea, the head of the WA restructuring team at Clayton Utz, and of course he joins us from Perth. Cameron, a warm welcome to BRR.
Now Cameron, despite the mining boom in WA, the number of insolvencies over the past few years has increased by 134%. What do you think are the main factors driving this surge?
It's the old story, there's lies, there's statistics and there's more statistics. I think in WA we had a bit of a decline in insolvencies in 2010, certainly 2009 was up, so there's a comparative increase in WA.
You also find that there are a couple of economic factors which are contributing. In WA we've really got two major sectors - one is agribusiness and one is mining services - then we have tourism and retail which feed off those two.
In the agribusiness sector there's been a bit of climatic pressure, enterprise pressure, which has led to some pressures in the farming community. We haven't seen any sizeable insolvency events in that sector yet but we have seen some on-service pressure such as fertilizer suppliers, fuel suppliers, at the small end of town who have suffered a bit of financial pressure.
In the mining services sector, although there are some huge projects in WA, there are cash-flow limitations out of those huge enterprises, one of which is there's a cash-flow time lag between a party skilling up and incurring the capital expenditure, incurring the labour costs associated with building into those projects, and then actually being paid for their services.
I think that's probably the major pressure that faces WA companies at the moment - that time lag between putting in the time, the cost of incurring the services at their end and then being paid for it at the other end.
And what about the insolvencies that we have been seeing - are we seeing any areas in particular being vulnerable to insolvency?
The anecdotal evidence is it's more the small end of town at the moment, the 2-3, maybe under 10 person groups which have got to the stage where the capital cost's too high, the cash-flow constraints are too high, and the alternative uses of their labour on personally working on the big projects just makes it more economic for them to close down and to go onto the mines themselves. So the small end of town really covers every sector you can think of - full retail services, tourism and other forms of services.
We haven't really seen in the last 12 months the larger end of town suffer the same sort of enforcement pressures that we did in 2009 and 2010. We haven't seen an Alinta fall, we haven't seen another Griffin come under pressure, we haven't seen another Windimurra. Great Southern is a couple of years old. We haven't seen those really big end of town failures.
What we're seeing though is a shift to more turnaround workouts where the big end of town, the directors, need to strategically plan to invest into the future and to replenish the capital to come up with a new form of operational turnaround and save the business. So the big end of town is surviving more because they're facing up to their problems earlier; the smaller end of town is under the cash flow pressures that we spoke about.
And Cameron, just looking to the future, what is the outlook in terms of insolvencies in WA for 2012?
Sometimes you wonder whether growth is such a good thing because I suspect we're going to see quite a few more insolvencies in WA. Certainly the fabrication, engineering, construction sectors are all said to be under a lot of pressure at the moment and the people that are speaking to us are in those sectors.
There are probably three reasons for that.
One is that they invested heavily into capital a year or so ago and they're coming under pressure from their financiers to pay for the loans that were taken on.
Two, they're seeing the cash flow pressures that we spoke about earlier.
Three, there's a fair degree of interaction between the small fabricators and the large contractors working on these sites who are quite often offshore entities. They're requiring variations or renegotiations of existing contracts which small WA suppliers really just can't cope with without coming under further commercial pressures themselves. Where they can't then fund the renegotiated contract they obviously need to take some form of administration or protective action.
Well Cameron we'll have to get you back on board for another interview in 2012 to give us an update on how things do play out. Once again, thank you for joining us today.