Thursday, 17 November 2022

Turnaround professionals anticipate far more uncertainty for businesses in the coming year.

Results from the annual KordaMentha & TMA Australia Turnaround Survey are in. This year, industry insiders are predicting inflation, interest rate rises and governments prioritising fiscal responsibility will cause additional distress in the market. Despite some conjecture over the severity and timeframe of impacts anticipated to be felt by Australian businesses, most survey respondents expect insolvencies to return to pre-COVID levels within the next 12 months.

Restructuring Partner Sebastian Hams said, “The recent increases have been at the smaller end of the market, driven by the ATO action on Director Penalty Notices and cost pressures. We expect this activity to continue at the SME level and in 2023, to extend to larger enterprises as inflation, supply chain challenges, increasing interest rates and declining consumer confidence start to impact margins and forecasts.”

Each year, the survey seeks insights from turnaround professionals into the last 12 months and projections for the business and turnaround outlook in the coming year. The 2022 survey report focuses on market outlook, Australia’s insolvency environment, the current turnaround environment (including drivers of distress and access to financing) and expected responses from businesses and financiers.

One of the most notable insights from this year’s survey was the suggestion there is far more uncertainty to come. Other key insights included:

  • 61% of respondents anticipate a recession within the next 24 months, with a third of respondents anticipating this to occur in the next 12 months.
  • 70% believe insolvency appointments will return to pre-COVID levels within the next 12 months.
  • 63% believe the biggest issues facing businesses are rising input costs and labour force issues (attraction and retention).
  • 53% of respondents believe supply chain issues are still a significant problem for Australian businesses.
  • 59% believe cost reduction initiatives will be highly important, and almost half of respondents believe revenue growth is also of significant concern for their clients.
  • 88% believe lenders and business owners will, most commonly, explore options outside of formal insolvency appointments in response to distress. While most respondents also believe that M&A transactions relating to distressed assets will increase in the coming year.

In the current environment, access to financing is tightening, and 63% of respondents believe lenders are increasingly placing more importance on Environmental, Social and Governance (ESG) considerations. KordaMentha Partner Kate Conneely noted, “ESG focussed lending is both a risk mitigation tool and an attractive marketing tool to communicate a commitment to sustainability. For borrowers, ESG linked debt will continue to grow in popularity and prevalence, particularly where margin reductions occur on achievement of ESG focussed KPIs. However, with many corporates facing an abundance of pressures, including volatility and cost of capital escalations, there is an increasing tension between obtaining capital at its lowest possible cost, whilst pursing longer term ESG sustainability targets.”

The survey highlighted tension between revenue growth in a strong economy and implementing cost reduction in an inflationary environment. James Wagg, Executive Director in our Performance Improvement group noted, “We have recently started seeing more cost reduction and efficiency programs as inflation and interest rates put pressure on margins. However, companies are still very focused on revenue and growth given strong consumer demand. Whether this dynamic shifts is a key unknown to play out over the next year.”

See survey results

Hear from James Wagg discussing the survey results with Adam Lang on the Fear and Greed podcast: