Maria Slade, NBR interviews RITANZ chair, John Fisk.
2021 will be the watershed year for firms going bust, liquidators say.
New Zealand has “kicked the can down the road” and can expect a slew of company collapses next year, a leading insolvency practitioner says.
Measures such as the wage subsidy have put the brakes on business failures but there will be a lag, says PwC partner John Fisk, who is also chair of the insolvency industry body RITANZ (Restructuring Insolvency and Turnaround Association New Zealand).
“I think 2021 will be the watershed year when a lot of this starts to become a real issue,” he said.
Numbers of insolvencies were on the rise in February, with 157 firms going into liquidation and another 93 applications to wind companies up.
“We were heading into troubled waters.”
Then, in April, there were just 17 winding up applications.
Insolvency practitioners had discussed with officials prior to lockdown how to keep otherwise viable companies afloat through Covid, and this was why provisions such as the seven-month Business debt hibernation scheme and Director ‘safe harbour’ scheme were brought in.
“So, these things, combined with the wage subsidy, have meant the number of insolvency appointments has gone down considerably,” Fisk said.
“What concerns me is, what we’ve done is kicked the can down the road.”
The issue was more significant in Australia, where creditors could not get a statutory demand for a debt less than $20,000, and then had to give debtors six months to pay.
“It’s almost encouraged businesses to hoard cash, which is what you don’t want.”
But, apart from the wage subsidy, all of the New Zealand business assistance, such as rent and interest deferrals and the government loan scheme, was creating debt that must be repaid at some stage.
“We haven’t actually addressed the problem. All we’ve done is push the problem out.
“That’s going to be a really big ask for some firms.”
There had been $11.9 billion pumped into the economy from the wage subsidy, banks had been willing to give businesses deferments on loan repayments, and quite a few had headroom in their loan facilities anyway.
There had also been a bounce-back after lockdown, but it was not clear how long this would go on for.
How severe the number of company failures would be dependent on the industry, he said.
Food and IT businesses probably wouldn’t be that badly affected, whereas construction and tourism would be.
After the global financial crisis (GFC) much of the worst didn’t hit for three years, Fisk said.
There wouldn’t be a peak in tourism businesses failing just yet because most were going into their natural winter quiet season anyway.
Steeper than the GFC
But the pending rate of business failure would be much steeper than the GFC, “because it’s going to impact on so many more different businesses.
“In the GFC, we were donkey-deep in finance company problems, whereas this is much more industry agnostic,” he said.
“The questions [are], how long will that keep going and where does it end?”
There was still cash around and that had been seen with the number of companies that had done successful capital raises, Fisk said.
Private equity firms were still active in the market, and he had been “surprised” at what some of them were interested in.
“A lot of these problems are equity solutions rather than debt solutions, if businesses are viable.”
His advice to the government was to start picking winners and losers, even though it didn’t like to, Fisk said.
“If a business isn’t viable then you want to recirculate the assets in the economy as quickly as possible, and then spend your money on the ones that need support that are going to be viable in the future.
“That’s easier said than done, and banks will have to do the same.”
He encouraged firms to talk to the experts before things got too bad.
“Addressing these things early on is important. As an industry we don’t want a flood of these things happening; it’s not in anyone’s interests.”