Getting your house in order - What happens when the COVID support measures end?

Podcast transcript

Velvet-Belle Templeman

Welcome to Boardroom.Media.  My name is Velvet-Belle Templeman, and I’m here talking to Matt Byrnes, National Head of Restructuring Advisory at Grant Thornton.  Matt has particular expertise in assisting businesses in the manufacturing, real estate, and construction, transport, and hotel accommodation industries.  Thanks so much for joining us Matt. 

Matt Byrnes

Thank you. 

Velvet-Belle Templeman

So, Matt, Australia is officially in a recession, and the majority of economic opinion suggests we’re potentially in a slump for at least a couple more years.  We’ve seen high-profile collapses, including Virgin Australia, and more recently, Seafolly.  Are you seeing more businesses fall by the wayside?

Matt Byrnes

Well, Velvet-Belle, we’re not seeing the tsunami of formal insolvencies that perhaps I think people would have expected when COVID first hit in March.  Broadly speaking, there’s three reasons for that, or three measures that the government has brought in, that are impacting that situation.  The first of those is the JobKeeper program, which most people will have been familiar with; and that’s been the primary stimulus that the government has brought in to inject cash into the economy.  The second key measure was around the bank relief; so the banks came together, collectively, in around March, and agreed that they would provide relief to customers who needed it.  Relief in that sense means deferrals of interest and amortisation payments over about the same six-month period.  It’s important to note that’s not a free hit for businesses; that’s just a deferral to allow them to get some breathing space, really, and to relieve the immediate cash burden. 

The third element or key measure that government brought in was temporary changes to the insolvency laws; and twofold within that, the first of those was some relief, a moratorium in respect to director liability for insolvent trading, which is normally a key trigger for directors of companies to need to appoint administrators or liquidators; and the second element was around the statutory demand provisions.  Now, this is the primary avenue for one business to pursue a debt against another.  We saw some changes around the timing and thresholds for issuing stat demands.  So, those three measures together have really been what’s impacted the current situation, which as I said, is a much lower level of distress and formal insolvency than we might have expected a few months ago.

Velvet-Belle Templeman

You mentioned JobKeeper, and we know that JobKeeper ends towards the back end of September.  With the tap turned off, what will this mean for businesses?

Matt Byrnes

Well, we’re definitely going to see more businesses struggling to stay afloat when JobKeeper ends, particularly in those hardest-hit segments.  So I’m talking about retail, hospitality, and tourism in particularly.  But across most sectors, there’s going to be some impact when JobKeeper finishes.  Interestingly on the flip side, we’re seeing examples of businesses that are actually making money and doing quite well during this period.  I was meeting with one business that was in manufacture and distribution of bedding products, and they were able to continue to operate at about 70 or 80 per cent of what they were doing previously.  They had enough demand in the market, they were able to reconfigure their operations, and they were continuing to operate at up near close to normal capacity.  Now, they were able to access JobKeeper; that enabled them effectively to redeploy their workforce at minimal cost, but they were still trading at 80%.  So they’ve actually been stockpiling cash and their balance sheet is going to come out of COVID looking much healthier than it would have been if they weren’t able to access JobKeeper.  So I don’t know whether that was the intention of the JobKeeper program when it was brought in; probably not, but we are seeing a number of businesses that are doing quite well, and are going to position themselves pretty well coming out of the end of the JobKeeper program.

Velvet-Belle Templeman

So, Matt, was JobKeeper merely delaying the inevitable?

Matt Byrnes

Well, it’s a good question.  I think for some businesses, absolutely it was delaying the inevitable, and they’re going to see the impact of that, the fallout if you like, coming over the next 12 to 18 months.  But just to go back a step, in terms of the JobKeeper program, there’s no doubt in my mind that that was the right move by government.  In times of crisis, we need decisive, bold moves.  Blanket moves, if you like, to try and bring certainty to people.   And that’s what we saw through JobKeeper, and that’s what we saw through the temporary insolvency law changes.  I think there was a lot of discussion at the time when they were brought in, that perhaps they were too broad; that there might be some businesses and people who would take advantages of those changes, and some people would benefit more than others.  That sort of thing.  But on the whole, we did need a strong, decisive measure taken by government, and that’s what we saw.  But for those businesses who aren’t going to survive, and there’s going to be a lot of them, there is an element here of kicking the can down the road, and JobKeeper is really enabling them to access money that they can continue to pass through.  But really, if there’s no prospect of those businesses being viable at the end, then it’s inevitable that they will confront a situation when the JobKeeper program runs out.   So it has allowed them, along with the other relief measures, to buy time in the short term. 

Now, ASIC is concerned about this; they’ve come out and warned the market about there not being enough liquidators in Australia, potentially, to respond.  I don’t know whether that’s quite right, but that’s illustrative of their concern.  We know the banks are concerned as well; they’re doubling and tripling their workout teams in the banks, and these are the areas in the banks that deal with customers that are struggling.  They’re not seeing the flow of files into those areas just yet, but we expect they will.

Velvet-Belle Templeman

Matt, there’s a stigma attached to voluntary administrations, isn’t there?  It’s seen as the last resort before collapse.

Matt Byrnes

Yeah, there is certainly a perception, Velvet-Belle, about voluntary administration here in Australia.  It goes back a long time.  I think if you look at the statistics around administrations, you’ll see that the vast majority of companies that do go into administration ultimately end up in liquidation, and I think that sort of adds to the perception that maybe the mechanism doesn’t work.  Those stats are coloured a little bit by the fact that many of those companies that are going into administration are quite small, small to medium businesses, and it’s really the last resort for them.  You’ve got the owner of the business who has built it up, and has been running it for a long time; they’ll try pretty much everything before they get to that decision point.  Then once they’re there, there’s really no other option.  So the company proceeds into liquidation.  So it does distort those stats a little bit. 

We also tend to compare ourselves to other jurisdictions, and if you’re looking at the US, where they have quite a flexible Chapter 11 regime, which is company friendly or debtor friendly; more recently the UK has brought in some new changes to their insolvency laws during COVID, which are also aimed at providing more flexibility.  I think when people look to line up our voluntary administration regime here in Australia with what we see in those other advanced markets, we’re seen to be quite inflexible.   All of that being said, I do think there’s a role for the voluntary administration process during this period.  I think we’re going to see more of it.  We’ve seen some examples already; so, Virgin is a significant example that’s playing out through a VA process, and we’re seeing three or four examples in the retail sector, where that’s the case as well.  So I think we’re going to increasingly see the voluntary administration regime used over the next 12 or 18 months as the rest of the COVID fallout plays out. 

Velvet-Belle Templeman

Okay, Matt; so, talk this through with me.  You’re a director of a business, and you’ve really benefited from recent government programs and support, but that’s going to dry up in three months.  What should you be doing?

Matt Byrnes

Well, I think you’ve got businesses where clearly, they’re not going to survive post-COVID, and I think directors of those businesses need to be realistic, and they need to be thinking about what steps they’re going to take in respect to their business, if they’re in that situation.  But to directors of other companies, my advice to them, quite clearly, is, “Get your house in order now.”  There’s an opportunity to make changes that perhaps they couldn’t make before, for various reasons.  So, what I’m talking about first and foremost is to make sure that they have some real rigour around their financial reporting function; that they are doing forecasting, they are running scenario planning through their business.  There’s a couple of good reasons for that.  The first one is that it informs the management themselves about where their business might go, and what sort of funding requirements they might need, what other changes they might need to make to their business going forward; and it also gives a level of comfort to the stakeholders that are dealing with that business.  So, whether that’s a bank, it might be the ATO in some cases, or it might be an investor who wants to put some capital into that business.  They want to see that there is good financial rigour and a sound platform in that business, so that people are making the right decisions. 

So for the directors, it’s also about potentially making hard decisions.  You know, that might mean in a business that’s got too many employees that they have to lose some of their employees.  That’s a hard decision to make, but it might be the right one for that business.  It might mean they’re operating out of too many sites, or they’ve got too many leases, so they need to look to try and exit some of those leases.  Or it might be destocking particular products that are company favourites and they’ve been selling for a long time, but they really don’t make any money.  So directors need to be prepared to potentially go back one step in order to go forward two steps.  Getting good advice is key as well; paying the money to get the advice is worthwhile, and so I encourage directors to make sure they’re doing that, and they’re getting the right counsel through the process as well.

Velvet-Belle Templeman

The measures in place to support businesses, do you expect any of these to be extended?  There have also been calls for some changes introduced to be made permanent.  What are your thoughts?

Matt Byrnes

Well, I think this is a really interesting question, because if you’d asked me this a couple of weeks ago, my answer might have been very different.  If you look at the three broad measures I talked about a bit earlier – JobKeeper, the bank relief, and then the insolvency or the temporary changes to the insolvency laws – I think there’s now a good prospect that all three of those measures might be extended beyond September in some form.  So, JobKeeper I think we’re going to hear more about next week from the federal treasurer, but all indications are that JobKeeper will be extended in some form.  Now, we don’t know whether that’s by state – we’re seeing what’s happening and playing out in Victoria at the moment – or whether it’s going to be by industry sector; but I think there will be some parameters around that, but JobKeeper certainly will extend beyond September, to cushion the impact for businesses in Australia.  In terms of the banks, we’ve already seen… I think announced last week, the banks have got permission from the government to extend their relief packages out for another four months to the end of January.  So that’s another indication that there’s this collective desire to try and cushion the impact of this cliff that otherwise would have come at the end of September. 

Then in terms of the third element, the insolvency law changes I mentioned earlier, there’s strong support now in the market.  We’re hearing a lot of discussion and lobbying of government about this, to extend the moratoriums and the relief around the insolvency law changes.  So we’re going to see potentially all three of those key measure extended beyond September, probably to around January or February, and then that will be monitored and we’ll just see what happens beyond that.  But that’s almost certainly going to happen.  In terms of those measures becoming permanent, my view is we won’t see those measures being made permanent.  There might be some tweaks around the insolvency laws, that get brought in; but if you look at JobKeeper, that can’t go on forever.  The government simply can’t keep funding the economy that way forever.  We’re accumulating a lot of debt, to be able to do that, and it’s the right call for the time, but it can’t go on forever.  So there’s going to be a point where that ceases.  In terms of the bank relief, likewise; the banks need to collect their money from their customers at some point.  They can’t keep deferring interest and amortisation principal repayments; at some point, that needs to kick back in.  And likewise, the insolvency changes or laws are there for a reason, and so I think we’ll see them come back.  And out of all this, Velvet-Belle, I think the businesses at some point will need to stand on their own feet, and they’ll either be viable or they won’t.  So, whilst the measures are there at the moment, and for the right reasons, to support businesses through the period, there will come a time where they’ll need to be able to stand on their own.

Velvet-Belle Templeman

Finally, Matt, think ahead two years from now.  The restrictions are gone, and the borders are back open.  What does the business landscape look like?

Matt Byrnes

Yeah, so, I think the lending market will certainly change.  We know and we’re hearing already that credit or funding from the traditional lenders, the big four banks and the other banks that we know, is going to be harder to obtain.  So, where do businesses go for that funding?  Well, they’ve got a couple of options.  They can look to the alternate debt market, and these are lenders that are largely unregulated in the same way that we know the major banks are.  They’re in many ways more flexible and nimble in their ability to provide access to funds for businesses, and in responding to those business needs.  On the flip side, these alternate lenders can be quite expensive, and they don’t always act in the same way that the big banks are now required to act.   You know, we’re post-royal commission, we’ve seen all of the other inquiries into banking that have meant that banks are very, very cognisant now of their community and customer expectations, and the way they need to behave, in the way they deal with customers.  These alternate lenders don’t always need to be cognisant of that.  They’ll behave differently, they’ll take more brutal decisions – if that’s the right word – in terms of how they deal with their customers.  So businesses that are accessing funding in the alternate debt market need to be mindful of that. 

There’s also for many businesses the opportunity to access equity or capital into their business as well.  So we know that there’s a number of private equity firms around that have got good balance sheets, they’ve got money that they’re prepared to invest; and so businesses are going to be able to potentially tap into that funding as well.  So I guess there will be equity and alternate capital available.  It’s going to be much tighter in the traditional lending market.  I think one thing that comes out of this is it’s going to force businesses to have much more robust reporting systems, financially reporting, accountability in their business, which is not a bad thing.  Because they’ll need to present themselves in a much better way in order to access that funding going forward.

Velvet-Belle Templeman

Matt, thank you for your time.

Matt Byrnes

Thank you.