Since the beginning of the pandemic the data that we have reported on has been very unusual and not what we would have initially predicted. The Australian Government helping the economy financially has played a large role in reducing the amount of corporate insolvency from 2020 to 2022.
It was not until late 2021 when we witnessed a couple of larger failures which looked to be the tipping point. For now, it would seem that insolvencies are on the rise, and this is because of a number of factors. Will we see a return to pre-pandemic insolvency levels in 2022, or will this be further prolonged until 2023? What we are sure of now is that the return to normality will take much longer than first thought and businesses will need to be aware of this for some time to come.
As a trade credit insurance broker, key indicators that are specific to us include the number of claims we receive, the overdue data that our clients are submitting, limit decisions from insurers and our incoming collection work. These factors give us an idea as to how the economy is performing around Australia.
A subtle increase in our Trade Credit Risk Index, which is a mixture of the abovementioned factors, indicates that we could expect more insolvencies in the remainder of 2022. Although it is a relatively small increase of 9.7%, the 2 key factors of claims and incoming collections are both up 25% and 30% respectively from Q4 2021 to Q1 of 2022. The number of reductions and NIL limits from the insurers have dropped this past quarter, suggesting their appetite for new business and trade in general is positive.
“incoming collections are both up 25% and 30% respectively from Q4 2021 to Q1 of 2022”
We have seen immediate flow on effects from some well reported insolvencies in Q1 of 2022, particularly Probuild and Condev, which has resulted in an increase in the number and value of claims. Without a doubt, these insolvencies will have flow on effects to other businesses in the industry, not just to the 50 or so NCI clients that have reported losses, but more so to those that deal with other suppliers.
This domino effect that we predict will mean that the number of insolvencies will grow, businesses will experience tighter cashflow, and many will have to seek additional work to recoup these losses. Depending on the outcome, more work will need to be sourced which could mean taking on more risky jobs, ultimately placing more risk on their business.
As part of the requirements of a trade credit insurance policy, clients must report to the insurer when an account has become overdue. This valuable information can be collated and summarised to show the total amounts that are outstanding in each band, either current, 30, 60, 90 or 90 days plus.
Our data shows there has been a decline in value of seriously overdue accounts (90+ days), in the first 3 months of 2022. The number of such accounts has stayed steady (if not increased) during this period. The reduction in the value of overdues could be the result of businesses taking earlier actions to recover their larger value debts at the expense of those of lower value overdues.
Considering the data we have examined from this Financial year, we believe that we are at the beginning of an increase in corporate insolvencies. The external factors and pressures on businesses have been building and for many this may prove too much. A renewed emphasis by the ATO looking at recouping outstanding tax debts and a tightened labour market will certainly play a part but the current pressures on the supply of materials – causing contractors to commit funds earlier than they otherwise would – will not only make businesses more vulnerable to failure but those failures will hit harder than they would have previously.
We are not just watching metaphorical boats head out into bad weather but heavily laden boats that have had to put off making repairs heading out into particularly stormy waters.