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Summary
- COVID 19 has created opportunities for some industries and problems for few, including airlines, banking, media, mining etc.
- To stop businesses to feel the burn of the pandemic, the Australian government designed a stimulus package that has been considered to be one of the main reasons explaining the declined insolvency appointments in the quarter ending June 2020 over the previous comparable period.
- However, once the federal government ceases to offer the moratorium on insolvent trading, many of the businesses are anticipated to operate with difficulty or no longer expected to run a viable business in the constrained post-coronavirus environment.
- Australian companies are avoiding insolvency by securing funds through debt financing or equity raising or by deferring dividends amid the pandemic.
Bankruptcies happen when the insolvent companies are not able to repay their debts to creditors and cannot carry on their business due to financial crunch. COVID 19 has brought a change in the lifestyles of the people, which are creating problems for some industries and opportunities for some other industries. The industries that are resilient to the outbreak of COVID-19 were agriculture, telecommunications, packaging, protein providers etc. while the most affected were airlines, media, mining, oil & gas, building material etc.
On that backdrop let us discuss the state of insolvency during the pandemic
Why investors are worried about insolvencies
The Australian government has paid hundreds of billions of dollars as a stimulus package to such financial distressed companies to sustain in the tough business economic environment. The stimulus was primarily a big help for those entities that the government had considered as "non-essential" like nail salons and fashion boutiques, which had been shuttered down during the lockdown to maintain social distancing.
Once the federal government ceases to offer the moratorium on insolvent trading, many of the businesses, which had been in financial turmoil when the COVID-19 crisis started, are anticipated to operate with difficulty or no longer expected to run a viable business in the constrained post-coronavirus environment. Therefore an aggregation of failures is projected once the stimulus packages come to an end.
According to media reports, leading economists like Fry-McKibbin and Triggs had earlier showed concerned over the withdrawal of support packages on September 29. However, they also put forward an argument that the Australian government should focus on providing big fiscal stimulus for “greening" of the economy and major public works projects than giving support to the companies for paying continued wages. For example, some program to deal with the situation of shortage of homes of about 650,000 home could help the economy to deal with the expected bankruptcies in the real estate and construction sector.
Furthermore, according to media reports, Assistant Treasurer Michael Sukkar and Jim Chalmers, opposition Labor Party Shadow Treasurer, are in favour of post-COVID policies that would offer targeted help to the industries that got affected hardest, rather than to continue with economy-wide stimulus.
The Australian Treasury brought down the estimated cost of the JobKeeper wage subsidy program of government by almost AU$60 billion from AU$130 billion to AU$70 billion after a recalculation. The news had been welcomed with all heart as it gave the government an opportunity to reallocate the funds to required spending.
When JobKeeper was designed, Treasury estimated about 6.5 million employees to access the program that provided flat AU$1500 a fortnight for workers who remain connected to their employer. Treasury in the month of revisited numbers and expected only 3.5 million workers to be availing the JobKeeper program.
The Decline in Insolvency Statistics
The disparity in the figures was backed by the reason that calculation was estimated when the number of COVID-19 cases in Australia was escalating rapidly, however, in the following months, the situation became more controlled, and economic outlook became more positive, leading to fewer workers seeking Job Keeper program.
The figures by the insolvency industry are also shocking as the numbers by the Australian Securities and Investments Commission reveals that there had been a decline of almost 43% in the number of companies entering external administration by appointment type for the quarter ending June 2020 when compared to the previous corresponding period. Australia’s support for businesses has been considered to play a crucial part in supporting the businesses during the economic turmoil leading to fewer appointments for external administration.
How ASX200 companies are dealing with Insolvency
Australia is one of the highest-yielding share markets in the world despite the fact that the business growth and revenues got compressed by the spread of the COVID-19 pandemic. ASX200 companies are either piling up cash through debt financing or by raising equity or by deferring dividends amid the pandemic.
Deferring Dividend yield
Dividend yields are projected to decline in the coming financial year, and according to industry analysts, there will be dividend yield of around 3.2% for the S&P/ASX 200 for nest 12 months starting July 2020, lower than the current yield of 4.16%. In addition, though the anticipated dividend yield for the S&P/ASX 200 will be lower than the current 4% average over the next financial year, the yield is still expected to be significantly higher than returns from bonds or cash. The dividend per share to be paid is expected to decline by 23.4% over the next 12 months. Further, the interim dividends have been deferred by many companies in order to maintain liquidity.
The banking sector has witnessed giants such as New Zealand Banking Group Limited (ASX:ANZ) & Westpac Banking Corporation (ASX:WBC) deferring their interim dividends while National Australia Bank Limited (ASX:NAB) has reduced its interim dividend by 64% to 30¢.
Raising Capital
Many companies are raising funds through equity or debt to strengthen their cash position, which has been disrupted by the COVID-19 pandemic. For example, Lynas Corporation Limited (ASX:LYC), Rare Earth minerals explorer, has raised ~AU$425 million through institutional placement and entitlement offer to fund the Lynas 2025 foundation projects. Insurance Australia Group Limited (ASX:IAG) had been intending to raise funds to secure a strong liquidity position.
