The dark clouds are reappearing particularly fast over Australia’s private sector after the little rays of sunshine on Tuesday.
MacroBusiness readers would be well aware that households are under pressure from high levels of indebtedness and most recently we have seen the rate of arrears climbing sharply in some areas of the country. The other side of the private sector is obviously businesses, and although the bullhawks are shrieking that anyone telling a doomy story is a part of “a handful of whinging retailers”, the latest statistics tell a very different story:
The most recent release of ASIC insolvency statistics reveals that 2011 is on pace to setting record highs in the number of corporate insolvencies.
According to Dissolve, a business specialising in liquidations, the number of companies entering some form of insolvency administration in the calendar year to July 2011 is the highest ever.
The number of insolvencies in the month of July was 921. While the figure is down from 1,027 in June, it was still the highest July figure ever recorded. New highs were also set for the months of March, April and June.
Statistics have been kept in the current format since 1999, and 2011 has seen a number of “highest ever” numbers.
In the year to July 2011 there were 1,355 appointments by secured creditors, which will be predominantly banks appointing receivers. Again that is the highest number on record.
Dissolve chief executive Cliff Sanderson said the figures were a reflection of state of corporate Australia.
“The same factors are at play which we have identified previously,” Sanderson said.
“The number of liquidations is high and going higher. Interestingly, the number of voluntary administrations, which have the stated purpose of saving a business, is the lowest ever on a 12 month basis.
A visit to the Dissolve’ site also provides some other worrying statistics and seems to directly challenge the recent reporting from banks that their bad debts are trending downwards:
- The number of companies entering some form of insolvency administration in the year to June 2011 was 9,829. The number per month was 1,025 , which is the second highest month on record and the highest June on record. It was a 21% increase over the previous June and a 36% increase over the average of the previous 5 Junes.
- The number of appointments by secured creditors, most commonly receiverships, is up 64% on the average of the previous 5 years.
- The cost of All Bank New Asset Impairment Charges, which equates to bad debts, by Australian Banks in the quarter to March 2011 was $5.1 billion. The total for the year to March 2011 was $22.3 billion. That compares to an average of around $4.4 billion per year for the years 1995 to 2008.
- The percentage of companies successfully restructuring is very low and trending lower. Only 5.1% of companies entering some sort of insolvency administration successfully restructured in the year to June 2011, being a success rate of 1 in 20. This compares to a high of 14% in 1999.
- Banks have $661 billion of outstanding loans to companies as at March 2011 compared to $423 billion five years ago, being a 56% increase.
- As at March 2011, Australian households were indebted at 155% of their disposable income compared to 98% ten years ago.
- As at April 2011, Credit Card debt was $49.3 billion compared to $16 billion ten years ago (RBA).
My assumptions are that this rise is mostly in the areas of tourism, manufacturing and retail, but it really could be anywhere outside of resources because this is what happens when a debt bubble deflates. Previously viable businesses suddenly find that the demand for their goods and services disappears. You just have to ask the overlord of retail king Gerry Harvey about that:
Gerry Harvey was in his usual ebullient mood, rattling through an annual meeting in quick time before stopping to chat with the press. It was 2003 and the billionaire retailer had been discussing plans to expand his Harvey Norman empire into Ireland.
”I believe the expansion into Ireland will be extremely positive for the company,” he said.
So excited was Harvey at the expansion into the Emerald Isle that he mused he wasn’t going to stop there. Perhaps, he thought, it was time to start selling ice-cream.
Nearly a decade on, and still buried in millions in losses, Harvey could be forgiven for wishing he had chosen ice-cream over Ireland.
Harvey Norman’s expansion began full of promise. The Celtic tiger was on a roll. A low tax rate and European Union aid helped the country into a sustained period of economic growth. But the country’s stunning collapse in the global financial crisis, when its debt-fuelled housing bubble burst.
Lucky we don’t have one of them here. Gerry believed that consumer spending in Ireland would go on forever and ever. How do I know? He signed up for 20 year leases:
Macquarie Research analysts estimate the retailer spends about $20 million in rent every year in Ireland and is stuck in lease contracts for up to 20 years. It estimates it would cost Harvey Norman about $400 million to exit Ireland.
Harvey has never shirked the size of his problem in Ireland. Among his colourful descriptions of the venture in recent years are lines like: ”catastrophic”, ”You’d want to go and cut your throat”, a return of the ”potato famine” , Northern Ireland was a ”bad mistake”, ”Ireland is a real worry” and ”I’ve never seen something get belted like Ireland”.
Lesson learned? Looks like it:
Retailer and property owner Gerry Harvey looks at the big picture — where things are likely to be 10 years from now — he sees more storm clouds for retail but opportunities in building accommodation for the booming mining sector.
Welcome to the quarry, Gerry