Challenge: calculate odds on confidence v post pandemic uncertainty
Talk to bankers and lawyers and they’ll happily tell you to expect resurgence in takeover and deal activity this year as businesses shrug off pandemic panic, and take advantage of astonishingly cheap funding to seek earnings growth.
Morgan Stanley Australia’s Richard Wagner says “the 2021 deal-doing prognosis is as strong as we’ve seen it for many years and is driven by confidence around a vaccine-led recovery.”
UBS Australia’s Anthony Sweetman adds: “It certainly feels overall that people and organisations are more optimistic now about the outlook.”
Yet Minter Ellison partner Victoria Allen warns in a media statement against basing too much confidence on the effectiveness of a vaccine in stamping out COVID-19. She says there are “simply too many variables” to make worthwhile predictions about the nation’s business activity this year.
And because SMEs account for only 14% of outstanding credit, banks may tend to be less concerned for their future than they should be. SMEs employ 55% of Australia’s workforce, and though there is evidence of recovery among many of them, the fate of thousands more hangs in the balance as the Federal Government progressively lowers levels of its financial support.
Unstoppable insolvency tsunami
The percentage of zombie companies kept operational essentially by government support is unknown, but what is known is they will soon be terminated as government financial support is inevitably withdrawn. To their demise will be added another significant percentage of 185,000 legitimately run companies SM Solvency Accountants estimates will have entered external administration by September this year -- by which time there will also be another 25,000 personal insolvencies.
In an attempt to lessen the destructive force of this unstoppable tsunami of insolvencies on the economy, the Morrison Government has introduced legislative reform effective from 1 January (explained in two other articles in this newsletter), while also permanently doubling the pre-COVID threshold for personal bankruptcy to $10,000. (At the height of the pandemic there was a temporary increase of $20,000.)
These measures will help many small businesses, sole traders and entrepreneurs recover from economic havoc caused by the pandemic’s lockdowns and physical distancing rules.
Bankrupt individuals are restricted from serving as company directors and face a range of other barriers including borrowing money, travelling overseas, running for parliament and seeking certain jobs, but the reforms will prevent people being bankrupted for small debts.
The temporary change last March that had increased compliance with a bankruptcy notice from 21 days to six months reverted to the original 21 days from 1 January this year, as did the temporary default period in which a debtor is protected from enforcement action by a creditor.
Among the realities of 2021
Pre-COVID business models are no longer viable for countless thousands of Australian companies.
The failure rate of businesses last year, according to Australian Securities and Investment Commission (ASIC) was -- at about 40% less than the 2019 rate -- the lowest in 20 years, essentially because of government emergency income support and temporary protection that allowed companies to continue operating while technically insolvent.
With much of that temporary legislative protection already gone and support packages for cash flow and job retention to be gone by March, many surviving companies will have to update their business plans in order to function profitably in a business climate irrevocably changed by the corona virus .
ASIC statistics show construction has been the hardest hit sector of the economy in the past 12 months followed by accommodation and food services. Insolvencies among entertainment providers, retailers, engineering companies and travel-related businesses are also frequent and continuing.
A simplified process inaugurated on 1 January allows directors of firms with liabilities of no more than $1m to – with creditors’ consent – remain in control of companies that qualify for appointments of “restructuring practitioners”.
The new regime which incorporates US-style Chapter 11 rules will enable businesses with a fundamentally sound core to restructure and develop a new business plan for long term survival, or at least wind up flexibly, inexpensively and in an orderly manner for the mutual benefit of all stakeholders.
A time of tough decisions
Things are not going back to what they were in 2019. Directors and their advisers have robust conversations and tough decisions ahead of them.
Business should not be permitted go forward in an uncertain future with unpayable debt – let alone increasing debt. Many cannot survive in failing to accommodate long lasting trends – fewer workers in CBDs, fewer international visitors, the opportunities and demands of a fast-tracking digital economy.
There are positive signs. Some 450,000 firms graduated from JobKeeper between September and October when eligibility for new, lower payments were applied, but half a million others were still relying on support.
Encouraging too is data from the Australian Banking Association (ABA) showing that very nearly nine out of 10 of the more than 228,000 business loans deferred by the nation’s seven largest banks at the end of June, thereafter started repayments.
Central bankers worldwide have been congratulating themselves over a financial system that has shown commendable resistance in the face of the most severe economic retraction since the Great
Depression of 90 years ago, but Macks Advisory believes they know only too well the battle against this pandemic is by no means won.
Nobody knows how effective vaccines will be against rapidly mutating COVID-19, how long virus inflicted chaos here will continue, or how, where and to what extent the far worse devastation it is wreaking in other countries will continue to heap difficulty on the making of business decisions in Australia.
