The threat of insolvency facing ASX listed businesses is real, explains Sarah Sharples, the Finance Editor at news.com.au, with expert commentary from Insolvency Australia and 2 or its members, Mackay Goodwin and Auxilium Partners.
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There has been a lot of big building companies go under in Australia. But that could just be the tip of the iceberg.
Companies at the “big end of town” including those listed on the Australian Stock Exchange are at risk of collapse as interest rates rise and financial support for Covid is wound up, insolvency experts have warned.
Thyge Trafford-Jones, who has worked in insolvency for 20 years and is the director of Sydney firm Mackay Goodwin, said financially distressed businesses often known as zombie companies was a “growing phenomenon”.
But he said people often assumed a zombie company only existed among small operators, yet this wasn’t the case.
Zombie companies have been propped up by low interest rates, sympathetic credit policies where the ATO and creditors were forced to put a hold on collecting debts and financial help from government, which has allowed them to continue, he added.
“They really should have ben restructured or liquidated many years ago, but more recently with Covid and the significant government economic policies, that has allowed companies to continue on and make little to no profit. Instead, they are just keeping their head’s above board with assistance from government and low interest rates,” he told news.com.au.
“I think with it all winding down you will see this phenomenon will start rearing its head. We will start seeing companies be more exposed, but zombie companies are not solely an area of the small to medium enterprises, it’s also the big end of town.
“There’s a good percentage of ASX-listed companies that are in that similar situation, which you can see if you go through different financial reports of these companies.
“They are really just holding their head above water and only just meeting interest repayments on these debts that they obtained in low interest times.
“What will be a real shock and will roll them over is the increase in interest rates, which will either lead to an insolvency or a restructuring event.”
With big names such as building giant Probuild, Gold Coast-based firm Condev and smaller operators including Hotondo Homes Hobart, Home Innovation Builders and Next all collapsing this year, the construction industry was one area most at risk from this trend, experts said.
Russ Stephens, co-founder of the Association of Professional Builders, has estimated around 50 per cent of Australian building companies are currently trading insolvent – which means they can’t pay their bills.
Other industries at risk include transport and mining and gas, a sector which Mr Trafford-Jones has a significant number of ASX-listed zombie companies.
Bob Jacobs, head of Auxilium Partners, added aside from the building sector he’s seeing business failures in the healthcare, social assistance, retail shopfront traders, tourism, hospitality and contracting sectors.
“Unfortunately, such businesses are least likely to have real assets to sell to pay creditors. A slower economic recovery due to new Covid variants, and bottlenecks in the supply chain will continue to bring about an interesting mix of insolvencies,” he said.
In May, retailer and grocery company called Send that promised to deliver groceries in under 15 minutes collapsed putting the jobs of 300 staff in Sydney and Melbourne at risk.
Mr Trafford-Jones said it was previously thought a “tsunami of insolvencies” and personal bankruptcies would hit Australia, although bigger companies are generally better protected.
“You find again that the big companies usually find a way to restructure. Their impact is quite huge and particularly on the economy itself, so they finds ways to find the money to restructure themselves into a position that allows them to go forward,” he said.
“Which is very different to the small mums and dads companies, which make up 90 per cent of the economy in Australia. They aren’t afforded the same sense of protection and insolvency is the only option for them.”
Insolvencies are dangerous as employees are “heavily impacted”, tax revenue is lost, economic growth is flattened but it also has a knock on impact for businesses below who may supply or work with the company that has gone under, he added.
If several players in big end of town fell over, it would be brutal on the economy and ordinary Australians, said Mr Trafford-Jones, although this was a very unlikely scenario.
“If a number of these big ASX-listed companies went down and they had considerable liabilities in play of $300 million that is going to add up into the billions and it would be significant,” he said.
Gareth Gammon, director of Insolvency Australia which has 700 registered professionals, added a rise in business insolvencies is likely in the third and fourth quarters of this calendar year.
“However, I’m hearing from Insolvency Australia members that there will also be an increase in ‘legitimate’ trading companies seeking insolvency or restructuring support, particularly those that have exhausted their cash reserves and are getting knocked back for funding,” he said.
“After two years of limbo for the insolvency sector, we are seeing a rising number of external administrations and while the levels have not yet returned to normal, there’s an expectation that will occur over the next 18 months or more.”
Mr Gammon pointed to key triggers including the ATO ramping up debt collection and inflationary pressures as contributing to an increase in insolvencies.
The ATO also issued 52,319 notices to company directors warning them about the ATO’s powers to issue Director Penalty Notices, according to a spokesman for the ATO, and sent an additional 29,552 letters regarding tax debts.
Insolvency Australia members have predicted a rise in insolvency matters, starting in July and then later in the year after the effect of interest rate rises and inflation will bite.
The March Australian Bureua of Statistics figures showed that almost a quarter of businesses expected it to be difficult or very difficult to meet their financial commitments over the next three months.
“I think for companies and businesses operating in today’s market it really is important to remain vigilant when scrutinising the customer’s ability to pay and to revisit or reassess credit terms with any business that exhibits zombie like behaviour – watch credit reports and watch if the ATO is recording any defaults,” Mr Trafford-Jones added.