Many businesses around the globe survived the effects of the pandemic thanks to fiscal support provided by their governments. But as this support is phased out, corporate insolvencies are set to take off. A report from trade credit insurers Atradius forecasts that while robust growth is expected for world economies in 2022, global corporate insolvencies will increase by 33% – with Australia expected to record one of the highest cumulative growth rates.
One of the reasons behind the elevated numbers is that while many companies were saved from corporate insolvency, thanks to government support, having this removed will return insolvency numbers to “normal”. And a slower recovery – which could arise as a result of a new variant of the virus or supply chain bottlenecks – could contribute to higher-than-normal numbers.
In the report, Atradius Senior Economist Theo Smid says global insolvencies declined by 14% in 2020 and a modest 1% decrease is expected in 2021. “This is a significant downward adjustment compared to our forecast in early 2021,” he says. “The still low level of business failures this year is due to the extension of fiscal measures in many countries, and in some cases due to the continuation of insolvency law amendments.”
Smid says on a regional level, Atradius expects rising insolvencies in Europe in 2021, while the trend is positive – i.e., downwards – in North America and the Asia-Pacific region. “In 2022, we expect global insolvencies to increase by 33%, as fiscal support will be completely phased out by then in most markets,” Smid says. “This will cause a ‘return to normal’ in the insolvency level, together with insolvencies of a certain share of businesses that were ‘saved’ from bankruptcy in 2020. As a result, the level of insolvencies in all three regions will increase.”
Australia’s insolvencies set to soar
The top three countries the Atradius report states it expects the highest cumulative growth in insolvencies to occur in 2021 and 2022 compared to pre-pandemic levels, are Italy (+34%), the United Kingdom (+33%) and Australia (+33%).
One of the reasons the report is predicting high levels of insolvencies for Australia, is because of the Delta variant outbreak the country experienced in mid-2021. Smid says Australia’s GDP recovered faster than expected in the second quarter of 2021, but the economy suffered following the outbreak.
“The pace of vaccination was also slow initially,” he says. “This has since picked up, but GDP is expected to contract in Q3 as a result of the reimposed lockdowns with full-year growth estimated at 2.9%. This will be followed by an expected 3.8% GDP expansion in 2022.”
Challenging times for SMEs
ASIC insolvency statistics show that Australia’s formal insolvency appointments remain well below historical averages in Australia. CommSec Senior Economist Ryan Felsman says the data shows there were 4234 corporate insolvencies in FY21, a 42.5% fall on the prior fiscal year.
“Insolvencies were 7.2% below the historical average,” he says. “In fact, 3709 fewer companies went into external administration last financial year than on average, with court liquidation appointments plunging 72%. And companies entering external administration hit 22-year lows of just 192 in January 2021.”
Data from the Australian Banking Association also shows how difficult it’s been for small businesses during Delta outbreaks and associated government restrictions. In August, the number of business loan deferrals increased nearly six-fold, rising from 600 to 3500, with owners unable to make their repayments.
However, Felsman says he understands insolvency practitioners aren’t expecting a surge in formal insolvency appointments: “Rather they’re expecting an increase in advisory services to help businesses navigate the new business environment.”
GRIP provides cross-border insolvency expertise
If international advice is required, insolvency practitioners have the option of reaching out to GRIP (Global Restructuring and Insolvency Professionals) – a professional network designed to help independent insolvency firms based around the world. Specifically, it’s a cross-border marketing and referral network that provides access to insolvency practitioners, such as Jirsch Sutherland International, who are based in a number of countries and can support members with their local knowledge of regulatory, legal and practical issues.
Jirsch Sutherland is Chair of GRIP Asia-Pacific and National Managing Partner Bradd Morelli says as more countries open up following the restrictions imposed by the COVID-19 pandemic, it’s likely there will be a greater demand for international expertise and experience in the insolvency and restructuring sectors.
“While fiscal support has helped many businesses to survive, there’s little doubt once that support ends, global insolvencies will rise, and in some cases quite dramatically,” Morelli says. “With the help of GRIP members, cross-border referrals are possible with overseas associates, even in a world impacted by a pandemic.”
Meanwhile, Atradius’ Smid says beyond 2022, insolvencies will start to decline or remain constant and zombie firms that aren’t able to survive without support will have already become bankrupt.
“It’s clear the phasing out of fiscal support could present challenges to some firms in the short term as they once again have to operate in an environment without significant government support,” Smid says. “Some firms are especially vulnerable as they have taken up higher debt to survive the pandemic.”
Confidence is needed to reinvest in businesses and here, Felsman says measures of labour demand, retail spending and business investment are critical to the economic outlook. “If the economic recovery strengthens as expected, tightening spare capacity, this could increase the willingness of Australian corporates to invest in their businesses and hire more workers,” he says. “At the same time, supportive policy settings – including low interest rates, tax incentives and the reopening of borders – would likely encourage businesses to borrow for plant and equipment purchases.”
With Australians learning to “live with COVID” the economic recovery over the next six months is expected to be bumpy. “While business conditions are expected to continue to improve, confidence remains fragile, especially in the hard-hit tourism and hospitality industries,” Felsman says. “So, a continuation of targeted government support may be necessary while businesses get back on their feet. That said, companies that come out of the pandemic in a parlous state should consult an insolvency specialist or initiate a formal insolvency appointment.”