Administrations rise as zombie firms accept reality

By Jotham Lian

October 15 2020
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Business administrations have started to rise for the first time since June, with Victoria and Queensland recording the biggest spikes, new data from CreditorWatch has shown.

Administrations rise as zombie firms accept reality

Business defaults also rose for the first time since May this year, increasing by 23 per cent in September.

The monthly CreditorWatch Business Risk Review found business administrations in Victoria rising by 23.8 per cent, following a 49.3 per cent drop in August, while Queensland recorded a 24.1 per cent increase after a decrease of 25.4 per cent in August.

In contrast, NSW recorded a further 1.6 per cent decrease in business administrations off the back of a 34.3 per cent drop in August.

CreditorWatch chief executive Patrick Coghlan said the timing of the rise in administrations with the end of the first round of JobKeeper suggests that some “zombie” companies are now waking up to the reality of their situation.

“September’s increase in default and administration rates does indicate that some businesses which have been reliant on government support are starting to accept the reality of their situation and are taking steps to settle with their creditors,” Mr Coghlan said.

“What we don’t want to see is businesses that are doomed to fail continuing to operate and taking healthy companies down with them.

“The long-term trend is that zombie companies will continue to survive on government support, and so, the next six months are crucial in determining what position we start our economic recovery from.”

While the government has announced an extension of insolvency relief measures to the end of the year, other support measures such as JobKeeper and loan repayment deferrals have started winding up.

The Reserve Bank of Australia believes government support has helped save 4,600 businesses from failing this year, with another 6,600 businesses to be saved once all measures are tapered off.

The RBA’s biannual Financial Stability Review has estimated that if the aggregate 3 per cent decline in 2019-20 revenue fails to recover in the current financial year, a further 5,200 businesses would fail in addition to the typical 15,000 to 20,000 firms that fail each year.

“Business failures will increase, although there is a high degree of uncertainty about the magnitude and timing,” the RBA said.

“It will depend on the strength of the economic recovery, which will be influenced by the duration and severity of future COVID-19-related disruptions, and the timing and extent of the unwinding of the various support measures.

“Bankruptcies and insolvencies are currently very low because of the income support, loan repayment deferrals and temporary insolvency relief.

“Business failures have flow-on effects to their creditors, both financial institutions and other businesses, and their employees.”

Payment times decrease in some sectors

Despite the rise in business administrations, average payment times were down by 10 per cent across all industries in September.

Payment times, however, remain high, with a 222 per cent year-on-year increase on average.

While industries like information media and telecommunications saw payment times fall by 30 days, the financial sector saw an increase of nine days, bringing payment time to a 62-day average.

“For a signal of how Australian businesses are faring, payment times provide a glaring picture of how tough the environment is, especially when juxtaposed against 2019,” said CreditorWatch chief economist Harley Dale.

“Payment times still remain too high, and some sectors are being particularly stubborn, such as the financial services and insurance sector, which jumped up in September, and the transport, postal and warehousing sector, which remains at a staggering 90 days.

“As government support is rescinded, which way this metric tracks will be crucial in determining how well Australian firms fare in our new economic world.”

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