'Business Stress Reports'

According to Restructuring Works, a business specialising in corporate restructuring, its latest Business Stress Report reveals that Australian Banks are continuing to suffer extremely high bad debt costs.  The Banks have reacted to this by taking possession of assets in record numbers and by conducting a much higher proportion of the insolvency work “in-house” rather than appointing an external Receiver.

Key findings from the report:

The latest Business Stress Report has analysed in detail the cost to Australian Banks of their “impaired assets” and how Banks have reacted to the significant increase in bad debt costs.  The key findings are:

• The annual cost of All Bank New Asset Impairment Charges, which equates to bad debts, by Australian Banks for the year to September 2009 has increased to $33.1 billion.  That compares to an average of around $4.4 billion per year for the years 1995 to 2008.
• The number of times Banks have moved to take possession of assets has increased to 1,342 for the year to November 2009 which is almost triple the average of 523 from the previous five years.
• When Banks need to take possession of assets they still appoint external Receivers in the majority of cases.  However, the number of “in-house” Bank appointments has increased five-fold to 505 in the year to November 2009.  This indicates a strong trend for Banks to conduct a far higher proportion of the management of their bad debts “in-house” rather than appointing an external Receiver & Manager.

Other key findings of the latest Business Stress Report are:

• The number of companies entering some form of insolvency administration was 9,544 for the year to November 2009.
• The number of companies entering some form of insolvency administration in the month of November 2009 was 747. That figure is a slight drop from the previous month but it has been relatively stable around 750 to 850 since the peak of 1095 in March 2009.

Comments

Restructuring Works Director Cliff Sanderson says “Corporate insolvency numbers have increased post Global Financial Crisis but that increase has been less than expected.  Hence, there has been a lot of discussion in the insolvency world about Banks “nursing” their problem loans and mention of the lenient attitude of the ATO during the last year.”

There are three parties that can initiate an insolvency appointment:  A Secured Creditor (commonly a Bank), an Unsecured Creditor (commonly the ATO, Workers Compensation Insurers or Trade Creditors) or the Directors.

Sanderson continued: “Our analysis shows that whilst it may be true that Banks are nursing many bad debts, at the same time, Banks have been taking possession of assets far more often than they used to.  Similarly, Directors have been initiating appointments more often. On the other hand, the number of insolvencies that have been initiated by Unsecured Creditors is virtually unchanged when comparing pre and post GFC.

Sanderson concluded: “So the group that has been tolerant and helping nurse companies that are in financial difficulty is in fact the Unsecured Creditors – Trade Creditors and the ATO – whilst the Banks have been very active in pursuing debts and have not been backward in taking possession of assets.

According to Restructuring Works, a business specialising in corporate restructuring, its third quarterly Business Stress Report reveals that corporate insolvencies have risen again, but not as much as expected. The new numbers raise the question as to whether insolvencies have peaked or whether it is the calm before the storm.

Key findings from the report:

The latest Business Stress Report revealed some plateauing in insolvency numbers with the following key findings:

• The value of All Bank New Asset Impairment Charges in the quarter to March 2009 was $7.1 billion which was actually a decrease from the December quarter record high of $8.1 billion. However, the rolling year total to March 2009 has increased to $23.5 billion. That is more than five times the average of the previous five years which was $4.5 billion.
• The number of companies entering some form of insolvency administration in May 2009 was a relatively modest 829. That was a 6% increase over the prior year May but off the peak of 1095 in March 2009. However, the total for the year ended May 2009 was 9,954 which is an increase of 37% on the average of the previous 5 years.
• The research also examined in detail what happened to insolvency numbers after the 1987 Stock Market crash and found that the number and value of bad debts did not increase materially for about 18 months post-1987 and the did not peak until 1992.

Restructuring Works Director Cliff Sanderson says “The Business Stress Report shows that the number of insolvencies and the value of those insolvencies are slightly off their peaks. That has surprised a lot of people. This raises the question as to whether this is another “green shoot” or just a pause on the way to the expected deluge of insolvencies.”

Sanderson continued: “After 1987, it took 4 years for insolvencies to peak with the number of insolvencies doubling and the value of those insolvencies up five fold. So far, we are only 18 months or less into this cycle so, if it follows 1987, it is still early days. This time around the number of insolvencies is up around 37%, which is in line with post-1987, but the value of insolvencies has already gone up five fold, so that is well ahead of post-1987.”

The Business Stress Report saw two possible conclusions from its research:

• That insolvency numbers have peaked much faster than they did post-1987; or
• If we follow the trends of post-1987, then the number and value of insolvencies will be materially more severe than post-1987.

Sanderson said: “I think the research is showing a pause in the rise in insolvencies and there is worse to come. I say that for two reasons. Firstly, we are seeing a large increase in the number of enquiries from directors of companies in financial distress but those directors are only just now starting to make the decision to actively address their company’s problems. Secondly, a key driver of insolvency numbers is the ATO which has publicly stated that it is willing to look at arrangements with businesses rather than pursue insolvency proceedings. In practice, we are finding that the ATO, and the Banks, have been very accommodating in restructuring company debts. But a reasonable proportion of the companies that are being given some latitude will ultimately fail. So it will take some time but ultimately we will see a further material rise in the number of insolvencies.”

We released our first Business Stress Report in January 2009. I’ve been in the corporate restructuring game for over 20 years and I’ve got to say that some of the statistics came as a complete surprise to me. I’ve checked with my colleagues who have been around as long as me and none of us had appreciated how low the success rate was in corporate restructuring.
As per the Press Release: “Our research shows that in 2008 the number and value of companies forced into some sort of insolvency administration has increased dramatically whilst the proportion of those companies able to reach a restructuring agreement with their creditors has dropped to an alarmingly low level.” The research revealed three key findings:
1. The number of companies entering some form of insolvency administration in the year ended November 2008 has increased by 25% when compared to the average of the previous 5 years. The 7 months to November were the worst on record (since 1999). The number of appointments by secured creditors, most commonly receiverships, is up 83% on the average of the previous five years.
2. The value of All Bank New Assets Impairment Charges has more than tripled to $13.3 billion in the year to September 2008 compared to an average $3.7 billion for the previous five years.
3. The percentage of companies successfully restructuring is very low and trending lower. Only 5.5% of companies entering some sort of insolvency administration successfully restructured in 2008, being a success ratio of 1 in 18. This compares to a high of 14% in 1999.

The third statistic is the standout. That is an amazingly low success rate in restructuring Australian companies that strike financial difficulties. Only one in 18 companies that enter a formal insolvency procedure can find their way through the insolvency legislation and creditor negotiations to agree a restructuring. What was a low restructuring success rate in the late 1990’s has gotten materially worse.
Who knew !! We have not seen this analysis done anywhere else. Back in 2004 there were a couple of formal reviews of our insolvency laws, most noteably by a Parliamentary Joint Committee which released Corporate Insolvency Laws: A Stocktake. If you are sleepless and want to have a look through the many submissions you’ll not find an analysis like the statistic we produced. There was some talk of the 14% success rate from 1999 but noone bothered to update the statistics. The consensus seemed to be that VA laws were working just fine. Well they’re not!
So what did we expect to find? It was generally understood that the number of corporate insolvencies increased significantly in 2008. What has not previously been appreciated was that the value of insolvencies has more than tripled and that Secured Creditors are taking possession of assets far more commonly. It has also not previously been appreciated that Australian insolvency laws are not working effectively – the restructuring success rate of 1 in 18 is extremely low and trending lower.
Malcolm Turnbull recently called for “…Australia to adopt rules which enable and promote corporate reorganisation and rehabilitation, having regard to the more successful features of, but not slavishly following the US Chapter 11.” Well our research makes it clear that the restructuring laws in Australia are just not working. I think Mr Turnbull is right in calling for a review of our laws.
It is unlikely that any meaningful changes will be made to insolvency laws in the immediate future and yet many companies will become financially distressed during 2009 as a result of the global economic crisis. So what does a Director do who is facing financial problems right now? Call us. I’ll reveal in future blogs some of our techniques but suffice to say that there is a wide variety of things that can be done to save a company. At Restructuring Works we have successfully restructured many companies in Australia and internationally during the last 20 years. Call us – we’d welcome the opportunity to help your company.