As the economic impacts of the COVID lockdown years begin to filter through, anyone and everyone with a financial heartbeat is bracing themselves for a bumpy 24 to 36 months ahead. As if on cue, both corporate and personal financial distress is on the rise. And as we know, what happens at the suburban family dinner table, eventually filters through to corporate Australia.
Australia, like the rest of the world, is subject to some challenging macroeconomic conditions – rising interest rates, high inflation, rising energy prices and rising costs of living are making it difficult for all Australians, both individuals and companies to make ends meet. For most, the pressure appears to be mounting and not abating as we continue to experience a scarcity of needs and wants due to the impact on world inventories firstly COVID production shutdowns, not to mention the impact of large natural disasters at home and abroad and of course the conflict in Ukraine.
But should we complain about the Keynesian economics adopted globally by Federal Governments during the Covid lockdown years? After all, as we know when it comes to economics “there is no such thing as a free lunch”. And didn’t the Feds pay for some “free” lunches during the Big Global Cash Splash of 2020-2022? Trillions and trillions of dollars in “free” lunches. It was fun while it lasted, and kept a lot of businesses going, but now Feds worldwide are handing out the party bills, in the form of contractionary monetary policy.
The price to be paid for the trillions invested into the global economy by Governments is spiralling inflation, brought into check by increasing interest rates. Australia recorded an annual CPI inflation up to the December 2022 quarter of 7.8%, the highest CPI movement since 1990. It's the topic most discussed at the suburban family dinner table (and the pub, water cooler, BBQ and so on).
So, what can we expect in the next 12, 24 or 36 months? I forecast history will repeat itself! Really you say, how insightful, not!
Let’s go back to 1990, the last time we had similar inflation and slightly higher mortgage rates. Australia was coming off an extended period of strong economic growth in the 80s, then the stock market crashed in 1987. It was the Hawk/Keating era, recession was looming because of the crash and Australia was promised a soft landing by Keating. 17 of the 18 major OECD economies entered recession during this period.
Ian MacFarlane Deputy Governor of the Reserve Bank of Australia subsequently stated that the corporate excesses of the 80s had left companies over-leveraged and vulnerable to the high interest rate regime. Above average levels of corporate failure followed. As the recession kicked in, asset prices fell, finance covenants were breached, and loans were called in but could not be repaid.
Keating initially promised Australia (akin to Lowe’s promise that rates would not increase until 2024) that Australia would experience a soft landing but by July 1990 had entered a severe recession leading to Keating’s famous quote that “This is a recession that Australia had to have”.
In summary, the global economy during the 80s was a powerhouse with businesses and consumers experiencing strong growth in asset values and gorged themselves on cheap debt. On cue, MacFarlane stepped in and started jacking up interest rates to control the growth in asset prices and curb inflation. Sound familiar?
Now back to 2023. What does the next 12 to 24 months look like ahead? Let’s look at some stats. Everybody loves stats!
Firstly, history, and a surge in corporate and personal financial distress experienced in other OECD economies during 2022 are a useful case study for what will occur in Australia once the global and domestic Covid impacts filter fully through to Australia’s economy. Australia is already experiencing an uptick in corporate and personal financial distress. The financial clean-up is underway.
Corporate insolvency statistics maintained by the Australian Securities and Investments Commission (ASIC) support the forecast. Personal insolvency statistics maintained by Australian Financial Security Authority (AFSA) are also on the increase, as well as AFSA forecasting personal insolvency numbers nationwide to trend back towards pre COVID yearly averages.
Let’s set a few benchmarks. The average number of corporate insolvencies between 2000 and 2020 was 12,191 per annum. The actual number of corporate insolvencies for the Covid years (2021 – 2022) was 6,072 and 6,055 prospectively. Then compare these numbers to a period of economic downturn, for example, the Global Financial Crisis years, where the annual average between 2009 to 2013 was 15,084.
An informed assumption, therefore, would be that in the next 12 to 24 months corporate insolvency numbers will normalise at least to the pre covid average and the tough macroeconomic conditions we are currently experiencing should push that number above the average although not quite as high as the GFC years. Is this trend realistic?
ASIC’s statistics identify a 67% increase in corporate insolvency numbers for the first 2 quarters of FYE 30 June 2023, compared to the same quarters for the financial year ended 30 June 2022. Is that the Jaws theme I hear playing in the background?
And what about personal insolvency trends? Bankruptcy and related personal appointments, hit an all-time low of 9,545 for the year ended 30 June 2022, against a historic average of 28,000+ personal insolvencies per annum. AFSA is forecasting a return to the historic average annual number. What about turbulent economic times? Post GFC, personal insolvencies hit an all-time high of 37,263 for FYE 30 June 2010. Yikes!
Now that you are dazzled with statistics what is my forecast? I’m predicting corporate and personal insolvency numbers for FYE 2023 to exceed 2022 numbers but still be below national pre covid averages. Numbers however for FYE 2024 and 2025, will exceed the historic averages, as the insolvency market normalises, adjusts for recessionary conditions, and catches up on the insolvency sleepers, that is those insolvencies that existed during the COVID period but were not dealt with by our financial system due to the government covid interventions in the insolvency market.
What does this mean for you and your clients? Healthy, well-managed, profitable businesses can and will endure tough economic times regardless of the cause. Businesses that are under-resourced, underperforming and not so well-managed take the brunt of the negative economic impactors that flow from destabilised economies and that underperformance dilutes the overall performance of the marketplace in which they compete.
Anecdotal evidence taken from recent Court lists for creditors petitions and winding up orders suggest the following industry groups are experiencing more than their fair share of financial distress under the current economic circumstances: -
- Building & construction
- Accommodation and food services
- Health & Fitness
With building and construction industries leading the way by a country mile.
It is the job of Australia’s insolvency laws and the professionals working within that regime to restructure, recover, re-deploy and re-distribute the scarce resources being consumed inefficiently by underperforming loss-making enterprise business to protect and promote a healthy financial system and a competitive and profitable corporate sector.
In most instances whether the insolvency & turnaround professional (ITP) is engaged to undertake a business turnaround or restructuring through a Safe Harbour or Small Business Restructuring exercise, or on the other hand, a terminal appointment such as a liquidation is all a matter of the timing of the intervention by the ITP. Intervention timing becomes all that more important in tough economic times because companies and individuals tend to move a lot quicker along the solvency/insolvency continuum when financial distress is endemic as the marketplace is not prepared to give too much, if any, financial leniency to distressed debtors.
Please do not hesitate to contact one of Shaw Gidley’s very experienced Insolvency and Turnaround Professionals should you have a client you believe is in need of assistance. As we say at Shaw Gidley, “It’s never too early to have a conversation about your business’s future”!