Many large construction companies have gone bankrupt in Australia. But that might just be the tip of the iceberg.
Businesses in the ‘big end of town’, including those listed on the Australian Stock Exchange, risk collapsing as interest rates rise and Covid financial support is removed, insolvency experts have warned .
Thyge Trafford-Jones, who worked in insolvency for 20 years and is the director of Sydney firm Mackay Goodwin, said financially distressed companies often known as zombie companies were a “growing phenomenon”.
But he said people often assumed that a zombie business only existed among small operators, but that was not the case.
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The zombie companies were buoyed by low interest rates, favorable credit policies where the ATO and creditors were forced to suspend debt collection and government financial aid, which allowed them to continue , he added.
“They really should have been restructured or liquidated many years ago, but more recently with Covid and the government’s significant economic policies, which allowed businesses to continue and make little or no profit. Instead, they are just holding their heads high with government help and low interest rates,” he told news.com.au.
“I think with the end of everything, you will see that this phenomenon will start to arise. We’re going to start to see businesses being more exposed, but zombie businesses aren’t just a domain of small and medium-sized businesses, it’s also the big city.
“There is a good percentage of companies listed on the ASX that are in this similar situation, which you can see if you look through different financial reports from these companies.
“They’re really holding their heads above water and just paying off the interest on those debts they got in times of low interest rates.
“What will be a real shock and reverse them is the increase in interest rates, which will either lead to an insolvency or a restructuring event.”
With big names such as construction giant Probuild, Gold Coast-based Condev and smaller operators such as Hotondo Homes Hobart, Home Innovation Builders and Next all collapsing this year, the construction industry construction was one of the areas most at risk from this trend, experts said.
Russ Stephens, co-founder of the Association of Professional Builders, estimated that around 50% of construction companies in Australia are currently insolvent, meaning they cannot pay their bills.
Other industries at risk include transport, mining and gas, a sector in which Mr Trafford-Jones has a significant number of zombie companies listed on the ASX.
Bob Jacobs, head of Auxilium Partners, added that outside of the construction sector, he sees business failures in the healthcare, social care, retail, tourism, hotel and subcontracting.
“Unfortunately, these companies are the least likely to have real assets to sell to pay off creditors. A slower economic recovery due to new variants of Covid and bottlenecks in the supply chain will continue to cause an interesting mix of insolvencies,” he said.
In May, a retailer and grocery store called Send, which promised to deliver groceries in less than 15 minutes, collapsed, jeopardizing the jobs of 300 staff in Sydney and Melbourne.
Mr Trafford-Jones said it had previously been thought that a “tsunami of insolvencies” and personal bankruptcies would hit Australia, although larger companies are generally better protected.
“You see again that big companies usually find a way to restructure. Their impact is quite huge and particularly on the economy itself, so they are finding ways to find the money to restructure themselves into a position that allows them to move forward,” he said. .
“Which is very different from mums and dads small businesses, which make up 90% of the economy in Australia. They don’t have the same sense of protection and insolvency is the only option for them.”
Insolvencies are dangerous because employees are “heavily affected”, tax revenue is lost, economic growth is flattened, but it also impacts businesses below that may supply or work with the failed business, he added.
If several big city players fell, it would be brutal for the economy and ordinary Australians, Mr Trafford-Jones said, although it was a highly unlikely scenario.
“If a number of these big ASX-listed companies went down and they had massive liabilities at stake of $300 million, that would add up to billions and that would be significant,” he said. he declares.
Gareth Gammon, director of Insolvency Australia, which has 700 registered professionals, added that an increase in business insolvencies is likely in the third and fourth quarters of this calendar year.
“However, I hear from members of Insolvency Australia that there will also be an increase in the number of ‘legitimate’ trading companies seeking insolvency or restructuring assistance, particularly those that have exhausted their reserves of cash and are denied funding,” he said.
“After two years of uncertainty for the insolvency sector, we are seeing an increase in the number of external administrations and although levels have not yet returned to normal, this is expected to happen in the future. the next 18 months or more.”
Mr. Gammon pointed out that key triggers, including the ATO’s acceleration of debt collection and inflationary pressures, were contributing to an increase in insolvencies.
The ATO also issued 52,319 notices to company directors warning them of the ATO’s powers to issue director sanction notices, according to an ATO spokesperson, and sent an additional 29,552 letters regarding tax debts.
Members of Insolvency Australia predicted an increase in insolvency cases, starting in July and then later in the year, after the effect of rising interest rates and inflation.
March figures from the Australian Bureau of Statistics showed nearly a quarter of businesses expected it to be difficult or very difficult to meet their financial commitments over the next three months.
“I think for businesses and businesses operating in today’s market, it’s really important to remain vigilant when reviewing the customer’s ability to pay and to review or reassess credit terms with any business that presents zombie behavior – look at credit reports and see if the ATO is recording any defaults,” Mr Trafford-Jones added.