AUSTRALIAN business continues to endure unprecedented levels of insolvencies and business liquidations and a legal specialist in the sector is warning that conditions are now heavily impacting agribusiness and mining services companies.
Law firm Henry Davis York (HDY) is warning that a combination of local and global pressures could see the number of domestic insolvencies increase significantly over the next 12-24 months, particularly in the agribusiness and mining services sectors.
According to Mark Schneider, specialist restructuring and insolvency partner at HDY, international uncertainty and increasing international competition is compounding a generally subdued growth outlook for the Australian market. Investment and business activity is yet to return to pre-2008 levels.
Mr Schneider said the agribusiness sector is under significant pressure, particularly due to recent extreme weather events.
“Agribusinesses in Queensland, NSW and Victoria have struggled recently due to the drought,” Mr Schneider said. “However, before this, particularly in Queensland and northern NSW, there was severe flooding.
“Lately it seems the weather conditions have been one extreme or the other, with enormous impacts on cashflow, forward planning and crop prices for those in the agribusiness sector. When coupled with a high Australian dollar and disrupted markets, for example the live export trade, the agribusiness sector has really taken a beating.
“Financiers in the sector will want to review their customers’ positions to protect their exposures and farmers may need to keep in close contact with their financiers to retain their support in these tough times.”
Mr Schneider also drew attention to the mining services sector, which has been held out as propping up the Australian economy for some time now, but is also under increasing pressure.
“A number of mines and associated mining projects are moving from the construction phase to the operational phase and others have simply been mothballed completely as the big miners look to cut costs,” he said.
“This sector has also been affected by fluctuating commodity prices and exchange rates, and now the consensus view seems to be that growth in this sector is slowing.
“In the main, banks with large exposures in the mining services sector have been very considered in working with their customers to address the challenges they face. However the changes in the mining services industry have wide-reaching effects.
“Some businesses have had to deal with a yellow goods market where demand was once so high that second hand equipment was selling for more than brand new equipment, but where there is now no demand and an over-abundant supply of expensive parked-up equipment.
“In addition, there are a host of other businesses in mining areas that are affected by the decrease in activity in this sector, notably accommodation providers and other suppliers to the mines,” Mr Schneider said.
Mr Schneider said a key trend to watch was the direction of investment into distressed assets.
“It is interesting that there is certainly available capital out there, both domestically and internationally, but there has not been a rush of investment into distressed assets in Australia,” he said.
“This could be for a range of reasons, including because of the perceived value of particular assets, regulatory and structural issues within industries and the relative number of opportunities in other depressed markets, for example, the US, UK and Europe.
“There remains much uncertainty about the global economy and in the meantime businesses in Australia will continue to face the pressures of subdued economic growth and increased international competition.”
HDY specialises in the banking, financial services and government sectors and focuses on ‘tier-one’ insolvency and restructuring expertise. Its latest research into Australian insolvency risks has thrown up the most vulnerable sectors as agribusiness and mining services.
According to HDY, the top five sectors at risk of insolvency at present are:
Agribusiness – because extreme weather conditions have caused significant financial pressures in this sector.
Mining services – with mining projects transitioning from development to operational phases and some projects being scrapped altogether, this has significantly reduced demand and the effects on associated businesses could see some suppliers facing difficulties in the next 12 months.
Manufacturing – the continuing strong Australian dollar and generally high cost of business operations in Australia have led major car manufacturers to announce their departure from the market. This will have strong flow-on effects to manufacturing suppliers in the auto industry who need to urgently re-tool or restructure their businesses.
Retail – this sector is continually under pressure from online competitors and strongly-backed international retailers entering the domestic market.
Aviation – there are smaller airlines beginning to collapse (such as Brindabella Airlines) matched with continuing speculation around Federal Government intervention for larger players, such as Qantas.