Insolvencies rise, debate over peak
Source: Queensland Business Review www.qbr.com.au
Corporate insolvencies are on the rise, but the spike has not been as sharp as expected, according to specialist firm Restructuring Works.
Restructuring Works’ third quarterly Business Stress Report reveals some plateauing in insolvency numbers, resulting in mixed predictions for future activity.
The number of companies entering some form of external administration in May 2009 was a relatively modest 829.
This result marks a 6 percent increase compared with last year, but falls short of a record 1,095 in March.
The value of all bank new asset impairment charges in the March quarter was $7.1 billion, which is a decrease from the December quarter high of $8.1 billion.
However, the rolling year total to March 2009 has increased to $23.5 billion, which is more than five times the average of the previous five years of $4.5 billion.
Restructuring Works Director Cliff Sanderson says the report shows the number of insolvencies and their subsequent values are slightly off their peaks.
“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,” he says.
“After 1987, it took four 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 percent, 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.
Firstly, “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”.
“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,” Sanderson says.
“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.”
