The Distressed Market

By John Vouris and Brad Tonks, Partners,
Lawler Partners, Business Recovery & Insolvency

The observations of a liquidator are bound to encourage investors considering assets in a distressed market.

Most people in business would probably say that they are sick of hearing about the Global Financial Crisis. And who could blame them. Though the reality appears to be that the lingering effects of the downturn are only just starting to crystallise and there is likely to be some great opportunities for investors watching over the distressed market.

Insolvency rates in Australia have not been as high as many people may have presumed. In general terms they have increased by around 5% to 15% as against previous years depending on which types of administrations you consider.

The most movement here has been in consumer insolvencies, or bankruptcies, not commerce. But if the first wave of insolvencies had a consumer slant to it, the second wave which is still building will certainly be skewed towards business.

The Government stimulus and the Australian Taxation Office’s (“ATO”) softly, softly approach to debt collection have no doubt played a part in keeping insolvent rates down.  However, the ATO’s approach has translated into around 150,000 payment arrangements worth $1.5 billion, and all up, the amount owed to the ATO by business and households as at 31 December 2009 has increased by around 10% over the past 18 months to $12.27 billion. That’s a lot of distressed debt.

2009 saw a great sense of anxiety in many markets. As a consequence, transactions slowed and many assets were seemingly held back. Especially so for banks and other financiers that were unable or unwilling to commit the security from distressed loans to a sale. Industries such as Hospitality, Transport and Earthmoving, Print and Property Developers have certainly been on their radars.

Not only was the supply of assets drier than many would have presumed, but demand was hampered as well. Even where assets were put to the market, the challenge for interested parties to raise money from investors or to borrow from the banks was unsurmountable in many cases.

While the ATO has been lenient towards struggling businesses, particularly during the height of the financial crisis, this will not always be the case.  The Commissioner of Taxation Michael D’Ascenzo recently told the Council of Small Business Organisations of Australia summit in Brisbane that firmer action will be taken with those who have escalating tax debts or are unable to meet their outstanding tax or Superannuation Guarantees.

From a distressed market point of view it appears that we may have some catching up to do where businesses have run out of steam or simply run out of time.

Interest rates have also crept up putting more strain on struggling businesses. The influences that we are seeing here are consistent with historical trends that tell us insolvency rates don’t normally peak until around 18 months after the economy bottoms out. If we look to the ASX for the timing of that bottoming out, we are looking at March/April 2009. 18 months post this means that we are now moving into that period.

Anecdotally, it appears that more fluidity is coming back into the market and the attitude of the banks in respect of distressed loans is shifting from a position of hold and monitor, to action and exit.

Further to that, on the lending side we also seem to be gaining momentum. Although still tight, particularly in industries where banks currently feel overexposed, we are seeing improvements and this is enabling more buyers back into the market.

As we move into that second wave, businesses that are heavily geared or those that have over capitalised are likely to be the most exposed and timely advice from an experienced insolvency practitioner could prove invaluable.  But for entrepreneurs and investors that are cashed up and ready to move, this spells a terrific opportunity for those with a good eye for for potential.

For further information contact Partners, John Vouris and Brad Tonks on 02 8346 6000 or via jvouris@lawlerpartners.com.au or btonks@lawlerpartners.com.au