July 20, 2020 / 8:53 AM / 21 days ago

Australia faces avalanche of business failures in September 'fiscal cliff'

SYDNEY (Reuters) - Australia faces an avalanche of business failures in its transport and hospitality sectors after government subsidies end in September, insolvency lawyers and economists say, while some argue that so-called ‘zombie’ firms should be allowed to fail.

About 240,000 businesses in tourism and professional services are at high risk of failing during the September ‘fiscal cliff’, when widespread wage subsidies are set to end, economists at Deloitte said on Monday.

Despite the pain, it has never been more important to let otherwise ‘zombie’ companies with endemic operational flaws fail, so as to allow capital to flow to productive firms critical to the recovery of the economy, they say.

“Money that is just floating around in businesses that aren’t really providing an effective output to the economy is problematic,” said John Winter, the chairman of the Australian Restructuring Insolvency & Turnaround Association.

“The challenge with those businesses that should have gone broke in this period, but haven’t because of the government’s stimulus, is that they are still racking up debts, and those debts are to somebody else.

“It could be the bank, it could be their landlord, but it could also be other businesses, their suppliers, so it’s not a victimless crime when you let zombie companies trade while insolvent.”

In March, complementing a A$160-billion stimulus package, Australia scrapped strict insolvent trading obligations on businesses and lengthened creditors’ notice period to act on debts, letting many firms keep trading without paying rent, tax and loans.

Banks alone have about 220,000 business loans worth over A$60 billion on loan repayment holidays and as the clock ticks down to September, analysts say the risks of foreclosures “en masse” are rising.

“We believe this is likely to weigh heavily on small businesses which employ 35% of the workforce,” UBS told clients in a note.

“As wage subsidies, rental relief and loan deferrals come to an end, this could lead to a second wave of unemployment.”

About 40% of businesses across hospitality, professional services, and transport say they only have cash for less than three months of operations, Deloitte’s report found.

“I think it is going to be profoundly challenging,” said Maria O’Brien, the head of Baker McKenzie’s restructuring and insolvency practice in Australia.

“I do anticipate that there will be really substantial numbers of insolvent enterprises, because revenues are not coming back - they would not come back immediately and they may not come back ever in a whole range of sectors.”

But while further fiscal stimulus is expected, some businesses should accept voluntary administration, some argued.

This bankruptcy process is akin to Chapter 11 in allowing moratoriums against certain creditor claims, which might offer the best way to help businesses survive.

“When used appropriately, administration can be an efficient and cost effective restructuring tool,” said Deloitte Access Economics’ partner Kristian Kolding.

“Society also needs to overcome the historical stigma associated with external administration.”

Reporting by Paulina Duran in Sydney; Editing by Clarence Fernandez

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