Company liquidations are climbing as Covid-related support that once shielded businesses starts to wear off.
“There was certainly what I’d call a sugar hit from Government in terms of support,” said John Fisk, Partner at PricewaterhouseCoopers and an insolvency expert.
“There was a number of levers that were pulled by Government that assisted businesses and a lot of good businesses survived but it also probably allowed some businesses that weren’t actually viable to survive longer than they should have.”
Since the initial outbreak of Covid-19 in early 2020, the Government has wheeled out tens of billions of dollars in support for businesses including wage subsidies and small business cashflow loans.
“In a way for some of these businesses that weren’t viable it was just kicking the can down the road,” Fisk said.
“We’ve sort of caught up to the can again.”
But it wasn’t just Government support helping keep businesses afloat, Fisk said.
“Inland Revenue had a couple of years of providing a lot of support for businesses. And also banks were being supportive as well and there were a lot of re-negotiated covenants that enabled businesses to continue to borrow and not go into default with their lending,” he said.
“All those things have started to come off, so that means businesses that aren’t viable have been more exposed now and are needing to either come up with a restructuring plan or go into a formal insolvency process.”
But while the number of companies being liquidated is climbing, they still remain below pre-Covid numbers.
March figures from the Restructuring Insolvency and Turnaround Association New Zealand (RITANZ) show year-to-date liquidations (including solvents) came to 308 for the first quarter of the year – higher than the same period in each of the previous two years.
The construction industry was the biggest driver of year-to-date liquidations, making up almost a third (29 per cent) of the total.
However, these were below the first-quarter liquidations recorded in 2020 and 2019 which were 432 and 377 respectively.
Meanwhile, Companies Office records also show an uptick in liquidations.
There were 374 liquidator appointments in the March 2023 quarter, a 20.3 per cent increase on the same period in 2022 (311) and 10.7 per cent higher than the first quarter of 2021 (338).
The previous quarter, December 2022, saw 489 liquidator appointments, up 71 per cent on the same period in 2021 (286) and 45.5 per cent higher than that in 2020 (336).
Last year there were 1556 total liquidations recorded compared with 1380 in 2021.
These again remain below pre-Covid totals where liquidations didn’t dip below the 2000 mark between 2003 and 2016 – reaching a high of 3433 in 2009 amidst the Global Financial Crisis.
Fisk said while liquidation numbers started declining in the 2010s, they were starting to rise again prior to Covid.
“New Zealand’s been through a pretty good economic period post-GFC from about 2014-15 onwards. Although they actually started increasing in 2019.
“Before Covid there was an expectation that we were heading into a bit of a recession then,” he said.
“That all changed with Covid and again we’re now probably in that situation where there’s almost an expectation that there would be some sort of increase in insolvency with a lack of confidence in the market.
“A lot of the confidence indicators are down. The global situation isn’t good when you look at all the factors that are going on, whether it’s geopolitical or economic.”
Angus Luffman, managing director of credit bureau Equifax New Zealand, said Government support had shielded many businesses from the initial impact of the pandemic.
“We have since emerged into a higher cost environment, with constrained supply and labour markets, increased costs of funds, tighter lending policies and softening demand. These factors combined squeeze cash flow.
“The trade payment data indicates that those already missing payments are finding it harder to catch up.”
Crippling costs and labour shortages have dogged the industry which has experienced more than 280 company liquidations since the beginning of last year.
Commerce and Consumer Affairs Minister David Clark confirmed last December there had been 283 building company liquidations in the 11 months between January 1 and November 24, 2022.
“Construction is an industry with relatively high risks and tight margins,” Equifax’s Luffman said.
“The variable factors at play in the economy at the moment amplify the challenges for cashflow - supply chain and labour constraints, higher input costs, tighter funding.
“The margin for error in pricing and delivery execution is much tighter, and the impacts can come from other parts of the value chain – e.g. if a developer gets in trouble and can’t pay the builder.”
Fisk said the liquidation numbers weren’t particularly remarkable historically, however.
“It’s always been high.
“It’s one of those industries that tend to have a lot of insolvencies because a lot of those businesses are smaller, undercapitalised businesses and when something goes wrong it can go horribly wrong quite quickly.”
The construction industry is a significant contributor to New Zealand’s economy, with an estimated $9.3 billion worth of building work put in place as of the December 2022 quarter, according to StatsNZ.
Business credit demand softens
A fall in business credit demand to below pre-pandemic levels is further highlighting the economic headwinds facing businesses.
Equifax’s Quarterly Business Credit Demand Index for March, released last week, revealed demand across all commercial credit types was at its lowest level since the initial Covid-19 lockdown in 2020.
Overall business credit applications for the March 2023 quarter declined 6.6 per cent compared with the March 2022 quarter.
Business loan applications decreased by 12.7 per cent, trade credit applications fell by 11.1 per cent and asset finance applications were down 5.6 per cent.
“The data shows that we have had a very slow start to the year for business credit demand,” Luffman said.
The first two months of the year saw a marked decline in overall demand which coincided with severe weather events, Luffman said.
“Business loans were most impacted continuing the trend decline we saw throughout 2022. However, we’ve observed some recovery in overall commercial credit demand in March which is a positive sign,” he said.
“The availability and growth of business credit is foundational to the productive growth of the economy.”
Most sectors were showing softer demand for credit, notably in construction (down 11.7 per cent) and agriculture, forestry and fishing (down 10.9 per cent).
The transport, accommodation and food services sectors experienced a strong increase in applications across all forms of commercial credit, up 15.2 per cent and 13.7 per cent respectively.
“These sectors benefited from greater mobility and travel in [the first quarter], compared to the constrained conditions of the same period in 2022 and propped up otherwise very soft demand for the quarter,” Luffman said.