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The Road Ahead

The year that was

The year that was

The big picture
2020 was a memorable year for many reasons to people in business. The impact of Covid-19 is certain to be at the top of the list.

Attempts to beat the virus prevented the most fundamental requirement of commerce – people selling to people. Here in New Zealand, our elected officials contended that defeating the virus and preserving the economy were achieved with the same strategy – go hard and go early. Of course, it makes sense that economic confidence will be restored when what caused it – demand turned off by the lockdown – is turned back on again. It is hard to argue against the strategy adopted, and government have been applauded internationally because of it.

There will be latent consequences though. One of the ways the government responded to the pandemic was by providing business subsidies to offset the economic impact of being in lockdown.

These subsidies were necessary to preserve the form and structure of business during the time that it could not fulfil its primary purpose – to trade.

The problem though is that subsidies produce inefficiencies and allow companies that are not viable to continue to trade as well as to potentially have other companies. In normal situations the market economy rewards businesses that produce goods or services profitably and sacrifices companies that cannot. This natural selection process is avoided when subsidies are available.

As the graph above shows – in calendar year 2020, formal states of insolvency were just 80% of 2019. When considered against earlier years this is a statistical anomaly and likely to result in a flurry of insolvencies when subsidies end. The same trend has been reported in both Australia and America.

There is much discussion currently about the next wave of insolvencies and the impact it will have on the broader economy. In my view, companies that have survived because subsidies have hidden pre-Covid underlying conditions, will find it very difficult to continue. The companies that were viable pre-Covid but have been impacted by demand shifts will either adapt or elect to stop trading before insolvency hits. The tourism sector is an example of this.


Where have the insolvencies come from?
Not surprisingly, the largest volume of insolvencies for 2020 happened in Auckland. The volume might be slightly disproportionate to the national population because Auckland businesspeople may be slightly less risk averse.

The table to the right shows the types of businesses that experienced insolvency in 2020. Construction is the leader with three sectors – business services, food and beverage, and property and real estate – coming in second.

Surprisingly, tourism has not featured as strongly as might be expected, given the lockdown and border restrictions.

It is likely that many of New Zealand’s tourist businesses were viable and solvent before Covid-19, and when border restrictions occurred the businesses either realigned their delivery to a new demand or ceased to trade.

Voluntary Administration can alter the course of insolvency
For many, insolvency is likely to be a once-in-a-lifetime experience. Events surrounding insolvency can be harsh and at times overwhelming. Creditors that the company has previously dealt with – in some instances for many years – suddenly find license to express their views about the company’s financial affairs in a direct manner and often without filter.

The appointment of an administrator – the first step of the Voluntary Administration process – brings much-needed independence and objectivity to the situation. A competent administrator is key to facilitating good discussions and guiding the parties towards solutions for the issues at hand.

Appointing an administrator stops the grab-and-run mindset that is so often a part of liquidations and lays out a path for creditors to express their views and consider the options available. No one party is entitled to act in a wholly self-interest way during this process. All the affected parties will be required to consider their options in the context of what is best for the company – or to abort and vote in support of liquidation.

There is no easy route in insolvency. Creditors will suddenly become aware that their claim in the company may not be as valuable as first thought. At the same time, shareholders will need to reconcile themselves to the reality that their time and capital may well be lost.

Regardless of the outcome, it makes sense to have breathing space between the time that help is required and the time that the final decision is made about the business’s future. Voluntary Administration can provide this.

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The Road Ahead

Business debt hibernation is here

Business debt hibernation is here

The Business Debt Hibernation scheme is now law, bringing help to those businesses that are vulnerable but still viable in these difficult economic times.

As of 16 May 2020, directors can begin a process that will allow their debts to be deferred for up to six months. There are rules to follow and qualifications that will limit some parties’ involvement. But the basic intent of the law will be achieved, as it provides some breathing space for companies that have been affected by COVID-19.

Although the Business Debt Hibernation scheme is proposed as a self-help system, it is unlikely to be easy to implement. One challenge facing directors will be their lack of familiarity with insolvency law. Another will be the inevitable human dynamics of the scheme. While the applicant has the advantage of debt deferral, the creditor has the corresponding disadvantage of waiting for debt to be paid.

There are 95 insolvency appointments for the month of May; 45% of these are in Auckland. Although Auckland continues to be represented disproportionately in insolvency numbers, it should be noted that many appointments are by the same shareholders. There can often be two or three liquidations within a group of companies.

The weekly count of insolvency appointments has gone up from 29 for the week ending 10 May, to 33 for the week ending 17 May. Although this is an increase, it is not a notable one. It is consistent with directors returning to their business issues rather than a prediction of the future.

The business services sector continues to lead insolvency appointments for the year beginning 1 April 2020 with 31 appointments. It is very likely that the providers of business services do not have significant business assets – so when insolvency occurs, ending the business by liquidation becomes the convenient option.

Close second is construction, with 23 companies in the sector facing a formal state of insolvency. Thirteen are in Auckland and Northland, six are in Canterbury and Marlborough, two in Waikato and one each in Wellington and Bay of Plenty.

Budget 2020 did not produce any real surprises. The government clearly showed it intends to help business as much as possible so the economy can become active again.

Regards

Bryan Williams (Accredited Insolvency Practitioner)
BWA Insolvency Limited

The place you go when Voluntary Administration can be used to help rebuild your business

www.bwainsolvency.co.nz

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The Road Ahead

Week one of a new world

Week one of a new world

This is a very big week for New Zealand companies. The ability to start doing business again – with some qualifications – is now a certainty. For many, this will be celebrated as a victory over a pervasive enemy. Business is ready to get back to work – and it needs to, so earnings can be created and company overheads met.

For others though, the prospect may not be so attractive. Faced with altered demand, sales may not return as they were before the crisis began. Operating overhead costs will need to be met from sources other than sales revenue. Some businesses will be facing the challenging question of what to do now. What was normal is no longer, with the problem made worse by the absence of any clear view of how business will develop in the future. There is no easy solution to this situation.

The economic effects of COVID-19 are already starting to show. Between 3 May and 10 May there was a 61% increase in insolvency appointments – made up of 28 liquidations and one receivership. There were no appointments made for Voluntary Administration. It is likely though, that as directors return to work and re-evaluate the survival of their company, they will consider the government’s initiatives to restore business health. This will include the Business Debt Hibernation scheme when it becomes law.

The heat map shows all insolvency appointments for the month of May so far. This reveals Auckland to be slightly over-represented, having 44% of the appointments made but just 35% of the total population. The remaining 56% of insolvency appointments are widely spread across the country.

Since 1 April 2020 there have been 125 appointments across 26 business sectors. Business services represent 19% of the total, with Construction at 14%. Retail makes up 9% of the total.

This week the Minister of Finance presents Budget 2020 to New Zealand, with the effects of the crisis expected to be a central issue. The Minister has the onerous task of finding the right balance between heating up the economy and containing debt. Unfortunately, not all business sectors will get what may be required, and hardship for some companies in those sectors will be the result.

Regards

Bryan Williams (Accredited Insolvency Practitioner)
BWA Insolvency Limited

The place you go when Voluntary Administration will help rebuild your business future

www.bwainsolvency.co.nz

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The Road Ahead

Statistics don’t tell the story yet

Statistics don’t tell the story yet

The three relevant metrics for understanding the impact on businesses are – how many have become the victim of the virus, where did they operate and what did they do. For the month of April, 52% of the insolvencies were in Auckland. This is disproportionate to the population of Auckland – which is approximately 35% of New Zealand’s total population. Eight of the 46 insolvencies in Auckland were Receiverships. This is also disproportionate, when compared to insolvencies in other provinces. However, with such a narrow sample, it is not easy to reach any firm conclusions. It is arguable though, that Aucklanders are less risk averse than in other provinces.

The weekly statistic shows just 18 insolvencies for the week ending 3 May 2020. Liquidations were the most dominant at 87%, Receiverships at 9% and Voluntary Administration at 4%. Although it looks like the trend for insolvencies is declining, it is likely that this is simply the calm before the storm. It is not surprising that there are lower volumes given the lockdown and there being no pressing need to make any decisions until we are at Level 2. There will always be a lower proportion of Voluntary Administration over Liquidations given the propensity for Directors to shy away from passing over the management of the company to an Administrator. That resistance though, inevitably exposes the economically vulnerable company to liquidation when it encounters circumstances that it cannot overcome.

As to the activities of the insolvent companies, Building Services and Construction have been hit the worst with 32% of the 88 insolvencies in April being in these two categories. Not surprisingly, retail and wholesale trade together with food and beverage make up 30% of the total. It seems odd that Finance and Insurance are at 6% but perhaps that reflects the growth of financial providers that have become an alternative to traditional capital raising sources over recent years.

Given the low sample size there is no pattern yet that tells a story directly relating to COVID-19 but I suspect that is on its way.

Regards

Bryan Williams (Accredited Insolvency Practitioner)
BWA Insolvency Limited

The place you go when Voluntary Administration will help rebuild your business future

www.bwainsolvency.co.nz

Categories
The Road Ahead

Key business statistics

Key business statistics

Business failure is an accepted consequence of entrepreneurs being active. It is also normal for failures to occur during a recession, when the economy contracts.

But what of an abnormal event such as the COVID-19 crisis? What will the future look like? How can viable businesses defeat the effects of the pandemic?

These are far from normal times. Commentators predict a frightening level of business failure because of the pandemic. If that does occur, there will be many job losses as well as a vast write-down of investment capital.

Most New Zealanders have engaged with the daily dose of statistics that the government has so freely shared with us. We’ve absorbed them, listened to the official narrative and been able to reach our own conclusions from the information provided. The government’s objective of ridding New Zealand of the virus is clear and they have allowed us to see what they see, which has brought almost everyone along with them.

Tracking companies that enter a formal state of insolvency is essential if we are to adopt a similar objective. How many companies have failed, where they did business and what they did is powerful information. Survivors want to see what is happening in their industry, investors need to gauge the value of their inputs and service providers want to assess their risk.

A society cannot stop business failure. New successes are the lifeblood of growth, and failure is an inherent element of striving to achieve. But we can work to stop the liquidation of companies that are victims of this crisis and knowing the landscape is essential if that is to be achieved.

Business success is based in the exchange of value at a level that achieves viability. It is hard enough to succeed in normal circumstances but when an all-encompassing event like COVID-19 depresses all activity, knowing its effect is vital if it is to be beaten.

BWA wants your business to make it through these difficult times and to flourish again. To help with that, be as informed as possible by signing up to our newsletter and receiving weekly updates on important statistical metrics and valuable business insights in respect of them.

Stay positive, stay safe, and don’t hesitate to reach out to us if you need any more information about any of our services.”

BWA Insolvency Limited

The place you go when Voluntary Administration will help rebuild your business future