Business insolvencies set to rise, according to CreditorWatch

Court actions rise, trade receivables fall, says credit agency

Business insolvencies set to rise, according to CreditorWatch

The coronavirus pandemic continues to a be a drag on many Australian businesses and insolvencies are set to rise, the January 2022 CreditorWatch Business Risk Index has revealed.

The business risk index (BRI) shows that court actions jumped a massive 58% over the last quarter compared to the same quarter last year. This is a return to pre-COVID levels and a strong indication that large creditors, such as banks and the ATO, have resumed regular collection activities, signalling business insolvencies will steadily increase across 2022.

Created by CreditorWatch, one of Australia’s leading credit reporting agencies, the BRI provides unique insights on the health of Australian businesses by region and industry. It ranks more than 300 regions by relative insolvency risk based on data from than 1.1 million ASIC-registered businesses.

The latest index reveals that the national probability of default remains flat at 5.7% for January 2022 against 5.8% in December. However, the January result was the highest in more than three years.

Victoria appears to be the most at-risk state, with a probability of default of 5.9% compared to 5.8% four months prior. This is consistent with other indicators suggesting that Victoria’s economic recovery will be slower to gather momentum than other states because of the duration and number of lockdowns endured.

The five regions most at risk of default over the next 12 months are:

1. Bankstown: 7.54% (NSW)
2. Canterbury: 7.69% (NSW)
3. Gold Coast-North: 7.70% (QLD)
4. Bringelly-Green Valley: 7.81% (NSW)
5. Merrylands-Guildford: 7.84% (NSW)

The five regions at least risk of default in the next 12 months are:

1. Glenelg - Southern Grampians (SA): 3.56%
2. Murray River - Swan Hill: 3.68% (VIC)
3. Limestone Coast: 3.72% (SA)
4. Grampians: 3.73% (VIC)
5. Lachlan Valley: 3.79% (NSW)

CreditorWatch CEO Patrick Coghlan (pictured above) said lockdowns in 2020 and 2021, particularly in Victoria and NSW, already had many businesses on their knees and it seemed the spread of Omicron was the coup de grace for a number of those.

Trade receivables, or amounts that a company has billed to a customer for delivered goods and services they haven’t yet received payment for, continue to fall dramatically, down 45% last quarter compared to the corresponding period last year and around 50% lower than pre-COVID levels.

January trade activity was weak following a dismal Christmas trading result. The sustained decline in cashflow will be a key driver of insolvency risk throughout 2022.

“The continuing slide in the value of trade receivables is a worrying trend,” Coghlan said. “The RBA’s view was that Omicron hadn’t derailed the economic recovery and when case numbers go down, the floodgates will open and consumers will rush out and start spending this $200 billion hoard of cash.

“I’d love that to happen so businesses can get back on their feet more quickly, but there are a lot of ‘ifs’ about that assumption.

“Pressure is mounting for interest rates to rise. If that happens, it will be another hit to small businesses. CreditorWatch is expecting business insolvencies to grow steadily this year, even if the RBA doesn’t hike interest rates.”

CreditorWatch chief economist Harley Dale said Omicron had heavily affected consumer demand at the start of 2002.

“Many SMEs were forced to close their doors again, following so much earlier promise, as the commercial viability of staying open simply wasn’t there,” Dale said.

“Many will return over the course of the March 2022 quarter and into the June quarter, but a significant number won’t. Extensive staff shortages form part of this story.”

Dale said key industries to watch in 2022 in terms of the probability of default over the next 12 months include accommodation and food services and information, media, and telecommunications.

“The number of external administrations dropped sharply in January 2022, but that is a familiar seasonal outcome,” he explained. “Looking through the latest result, administrations increased by nearly 1% in the January 2022 ‘quarter’ to be up by 1.4% over the year.”

The January Business Risk Index also includes state-by-state analysis on defaults, with the best and worst performing local government areas. Western Australia was the best performer with Victoria and NSW struggling to recover from their protracted lockdowns last year.

Western Australia was charging ahead of the rest of the nation, thanks to mining and agribusiness. In Queensland, agri-business centres and North Queensland were among the top performers in the country, while the Gold Coast was one of the highest risk regions.

In NSW, northern Sydney and regional industrial areas were performing well while Western Sydney, which experienced some of the city’s longest lockdowns, continues to struggle.

Regional Victoria was performing well but CreditorWatch is expecting a sharp rise in defaults for businesses in the Melbourne CBD across 2022.

Coghlan said the net result of the CreditorWatch Business Risk Index and its broader credit indicators is that the Australian economy has “some way to go before we can talk about a sustainably strong recovery”.

Dale said the summer of 2021/2022 was so full of promise, but Omicron came along in the first week of December and it all evaporated.

“There are some signs of economic and credit normalisation in the latest CreditorWatch results – external administrations being one example,” said Dale.

“Ultimately, though CreditWatch’s data points to Australia’s economic activity running at a much slower rate than desired. We are in for a bumpy ride, which creates the biggest challenge for SMEs – uncertainty.”