Bank crackdown likely on small businesses
The trend by banks in Australia to wind up a growing number of small businesses that have fallen behind in their repayments is likely to emerge in New Zealand, according to a specialist in Business Turnaround, Trevor Thornton of accounting firm Grant Thornton New Zealand.
“It would seem only a matter of time before banks on this side of the Tasman start to lose patience with companies that have not been able to effectively rehabilitate themselves,” he said.
Last week Australian Banking Association chief executive Steven Munchenberg, speaking at a Senate inquiry, said that after nearly two years of difficulty there were more and more companies getting behind on their repayments and that they could ‘very possibly’ be tipped into administration, receivership or liquidation.
Thornton says he is already starting to see a change in the way New Zealand banks are dealing with distressed companies. Additionally the banks are finding, on deeper investigation into clients’ affairs, considerable IRD arrears.
“When the downturn first hit hard last year, banks were willing to actively work with businesses to help them through the period, rather than tip them straight into receivership, which tended to be the case after the 1987 sharemarket crash.
“However, as more and more companies continue to wilt under the pressure of the recession, the banks’ patience and willingness to continue to support the more acute cases may be running out.
“The ones the banks think they can save they will, but the ones that cannot be saved or are not willing to help themselves could find themselves in receivership or liquidation.”
As well as bank pressure, Thornton said there are other forces that are causing problems, especially for SMEs.
“You only have to look at the damage that is being caused by some of the large receiverships that have occurred in the last few months. The Kawarau Falls development in Queenstown is a classic case of the domino effect that can occur throughout New Zealand when a large company goes into receivership.
“This has already led to a major contractor being placed in receivership owing approximately $3.5 million to over 300 subcontractors. As these subcontractors are likely to get only 20c in the dollar, there will be some who will go to the wall through no fault of their own.
“Other firms are just hanging on. There are those who rely on buoyant Christmas spending to build a buffer for the rest of the year. Many did not get this lift, and there are also the service firms that close down for a month over the holidays who are now struggling with cashflow because of that period of non earning.
“Even though confidence levels are on the up, all reports indicate that the SME sector continues to struggle. Couple this sentiment with a tougher line by banks and the IRD on ailing companies and it could be a long hard winter for many SMEs throughout the country,” he said.
Thornton said that not everyone is experiencing troubled trading, as there are a number of businesses that are performing well. “These are mainly the companies that acted decisively when first confronted by the economic recession, cutting costs to meet reduced demand. They are now positioned for the upturn as they can increase capacity without increasing fixed costs, by introducing a second shift, for example.
“I have clients at both ends of the spectrum. One reckons that if this is a recession, they are happy for it to continue while another ‘can’t get small enough fast enough’ as they attempt to realign capacity with demand.
Thornton says his firm has bolstered its resources to take on more turnaround work. “Decisive action is necessary to deal with the issues,” Thornton says. “Hope is not a strategy.”
Further enquiries, please contact:
Trevor Thornton
D +64 (0)3 379-9580
M +64 (0)21 345 510
E trevor.thornton@nz.gt.com