A recently published survey has found that the current insolvency rate for Australian business is running at less than half the pre-covid levels. However, this might be a result of the ongoing lockdowns and border closures.

Despite the winding back of government support packages, external administrations are still running at historical lows despite concerns last year that there would be a blowout in numbers.

The data from the survey consisted of interviews with insolvency professionals from across Australia and reveal only a small increase in formal insolvencies early this calendar year, however this was short-lived.

Border closures and lockdowns have been cited as a major reason for a fall in insolvency and turnaround inquiries. However, the survey found most respondents also credited government support for avoiding an insolvency tsunami. Insolvency numbers this year are running at an average of 363 a month, down 47 percent from a pre-Covid average of 679 a month.

Conditions are set to remain tough with border closures, with recruitment and supply chain delays cited as the most significant pressures expected by businesses nationally in the year ahead.

Furthermore, The Reserve Bank of Australia (RBA) has outlined that it believes a large number of businesses will struggle to survive after the extended lockdowns are lifted across New South Wales, ACT and Victoria.

In its most recent Financial Stability Review, the central bank noted that businesses in pandemic-affected industries or located in regions that have experienced prolonged lockdowns are more likely to be running down their buffers and some could face debt repayment difficulties.

“Despite the significant policy support, it is likely that not all businesses will recover and insolvencies will rise, although this will be from a low level. Overall, there is only a small share of households and businesses that are both vulnerable to cash flow reductions and are heavily indebted. Lenders’ non-performing loan ratios are therefore expected to rise only modestly from currently very low levels,” said a spokesperson for the RBA.

Overall, business profits increased in the first half of 2021. The Financial Stability Review noted that as a result of improved trading conditions, many businesses were well placed to absorb higher labour expenses when the JobKeeper subsidy ended in March.

“Aggregate cash holdings remained considerably higher than before the pandemic, with low interest rates providing support to indebted firms. Across nearly all industries, aggregate revenue had recovered to be around or above its pre-COVID-19 level in the first half of this year,” noted a spokesperson for the RBA.

Despite these findings, the RBA admitted that outcomes have been mixed across firms, reflecting the uneven impact of the pandemic. In particular, firm-level data shows that one-fifth of all businesses reported March quarter revenues this year that were less than 60 percent of their averages between 2014 and 2018.

Although just around half of firms reported revenues that either met or exceeded their 2014–18 averages in the March quarter of 2021, this share had increased from around 40 percent since the middle of last year, reflecting improved trading conditions and the broader economic recovery.

Close to 10 percent of businesses were receiving JobKeeper payments when the program ended in March 2021. Many were located in Sydney and Melbourne and, based on the most recent available data, in areas with relatively lower median liquidity ratios the ratio of current assets to current liabilities.

The RBA also noted that the prolonged lockdowns in Sydney and Melbourne in recent months mean that some vulnerable businesses will be depleting their cash buffers.

“Some may find it difficult to service their debts, particularly if their trading conditions do not improve when restrictions are eased and targeted policy support measures are withdrawn. Vulnerable firms may also find it difficult to maintain their current levels of employment given cash flow challenges. In turn, this could diminish the ability of affected households to service their own debts,” said RBA.

The team at C&D Restructure and Taxation Advisory are here to help. As part of the Vault Group we can offer the full suite of financial products and advice to help you navigate the business landscape. Schedule a meeting here via Calendly or give us a call on 1300 1 VAULT (1300 182 858)

Post Author: Craig Dangar

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