External administrations and court actions are on the rise and the ‘hands off’ approach to debt collection adopted by the ATO and many lenders during the pandemic is clearly over.
The July 2022 CreditorWatch Business Risk Index (BRI) has revealed that external administrations and court actions are on the rise as the era of cheap credit comes to an end and businesses with depleted cash reserves and thinning margins confront yet more challenges.
CreditorWatch’s Business Risk Index data for July shows external administrations have risen 50 per cent since April and are up 46 per cent year-on-year, while court actions are up 54 per cent year-on-year.
This is consistent with the ATO’s decision to ramp up activities such as garnishees, director penalty notices and legal actions.
CreditorWatch CEO Patrick Coghlan says that the ‘hands off’ approach to debt collection adopted by the ATO and many lenders during the pandemic is clearly over.
“The massive rise in external administrations is certainly a disturbing trend – now up 50 per cent since April,” he says. “Our data shows that court actions are back to pre-COVID levels and the ATO has also stated that it is ramping up legal action for outstanding debts.
“With business and consumer confidence declining and inflation and interest rates on the rise, this doesn’t bode well for businesses, particularly SMEs whose cash reserves were depleted during the pandemic and are now operating on much tighter margins.”
Small business default forecast
The small business default rate remains unchanged from last month. However, CreditorWatch still expects that this default rate outlook will increase, especially given the slowdown in consumer spending.
Source: CreditorWatch Business Risk Index – Business defaults defined as entering external administration or strike-off.
According to CreditorWatch Chief Economist Anneke Thompson, those businesses that in the capital-intensive growth phase are particularly at risk in the current environment.
“When interest rates were low and the world was awash with cash, investors were hungry for investment opportunities, and willing to move up the risk curve to find good returns,” she says.
“Now that cash is being consumed by ever-increasing prices and debt costs a lot more, the appetite for risk is dropping. Startup businesses or those in the growth phase are always deemed riskier. We have already seen this phenomenon hit the tech sector, and many well-known companies are being repriced to reflect this.”
Regions most at risk of default
Those areas that have a high proportion of households with a mortgage, as well as lower incomes, are among the regions with the highest probability of default. Areas with current subdivision activity are also at high-risk as property owners in these areas have owned their homes for a shorter period of time on average.
The five regions* most at risk of default over the next 12 months are:
- Merrylands-Guildford (NSW): 7.79 per cent
- Canterbury (NSW): 7.53 per cent
- Surfers Paradise (QLD): 7.49 per cent
- Auburn (NSW): 7.39 per cent
- Ormeau-Oxenford (QLD): 7.36 per cent
* Regions with more than 5,000 registered businesses
Probability of default by industry
The sectors where demand is most likely to fall when consumer spending eventually falters continue to have the highest likelihood of default. The food and beverage and arts and recreation services sectors also have a large number of relatively inexperienced, smaller operators, which further increases their risk profile.
The industries with the highest probability of default over the next 12 months are:
- Food & Beverage Services: 7.10 per cent
- Arts and Recreation Services: 4.64 per cent
- Information, media and telecommunications: 4.59 per cent
The healthcare sector continues to experience huge demand as COVID and other respiratory illnesses affect Australians in huge numbers. While this is a short-term impact, CreditorWatch considers that Australia’s aging demographic will mean the sector will continue to operate at close to capacity for the foreseeable future.
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