Insolvency: how to future-proof your business under Covid

During a period of heightened business insolvency Steven Holden offers some advice for New Zealand businesses looking to future-proof themselves by refinancing loans.

So the news is out that New Zealand is officially in a recession, following a loss of GDP at 12.2 percent in the latest quarter.
While many economists and industry commentators remain positive, with predictions for a quickor “V” shaped  rebound, there’s a layer of caution that needs to be taken with the level of uncertainty of an event of this scale. Business owners must be realistic and switched-on to protecting their livelihood.

State of play – The worry with insolvency data
While it may be slightly too soon to see the full business impact post the recession announcement, current insolvencies data shows a decline in businesses declaring insolvency over the past few months. This should ring serious alarm bells.
 
A total of 1319 insolvencies were reported in the 18/19 period, to just 1101 reported in the latest 19/20 period. In addition, the latest July 2020 stats show just 81 insolvencies compared to 92 in the previous period. Similarly, August 2020 saw 95 NZ companies insolvent, another decrease on the year prior which reported 131.
 
“Typically at a time of massive economic downturn, you’d expect insolvencies to trend upwards, but what we’re seeing is a decreasing number, even in the most recent months, showing that government stimulus has inadvertently created a bandaid for companies to fight Covid,” says corporate financier, Steven Holden. “The real and long-term fallout will become more evident when the government support currently propping up struggling businesses, comes to an end.”
 
Business solvency has worsened. The financial system could see non-performing loans soar, where Standard and Poor’s estimates that more than 20 percent of businesses are in serious financial trouble or close to bankruptcy.
 
Unemployment has been disguised and looks optically low due to the large proportion of government stimulus packages. The official unemployment rate (and also for those “underemployed”) could double or even triple when those subsidies end, conveniently after the General Election, and the businesses that kept those workers find the need to close permanently.
 
Meanwhile the Governments’ financial situation has weakened to extreme levels. Deficit spending has driven government debt to new record-highs. Government debt could increase well from 19 percent in 2019 where we enjoyed one of the lowest ratios in the world, to (well) above 50 percent of GDP, and that’s assuming no further “black swan” events such as prolonged additional lockdowns. To put this in perspective, the New Zealand government has $146B of debt and is scheduled to pay a whopping $6.3B in interest payments alone this year. This comes directly out of New Zealanders’ pockets.
 
At a refinancing crossroads? What next?
The above paints a very real picture many businesses are currently facing or are likely to come up against at some stage in their businesses’ life cycle; heightened during times of global crisis.

Businesses must act now to ensure they’re future-proofed should they need to refinance loans. Here are some suggestions:

• Business management needs to get ready for things to probably get worse, and have a plan.
• Talk to your banks and other lenders today, and try and seek their support of your plan. Ask for things like extended terms, deferred repayments, relaxation of covenants, debt:equity conversions. It pays to note that the previous ability to raise debt from one of the other banks is currently very difficult to do due to “new to bank” restrictions.
• If your balance sheet is “thin” and needs more equity, start raising more today, and reduce capex (opex) and dividends to that you have enough of a cash cushion to weather the storm.
• Get a “war chest” of cash ready to take advantage of your competitors getting into trouble, to either buy them, or grow organically.
• Protect revenues and cashflows by locking-in existing customers over longer term supply contracts, even if it means at lower margins, and try to find new customers, as some competitors fail.
• Try your best to get management and staff mentally prepared for the coming troubles.
• Remember, in times like these, “weak” companies can fail, but “strong” companies can also fail if these steps like these are not taken as quickly as possible.

Steven Holden (pictured) is director of the global private investor network Neu Capital.