MEDIA RELEASE: Global market conditions are not dissimilar to the 2008 global financial crisis and are leading to an inevitable rise in corporate insolvencies – exacerbated further by this week’s RBA rate rise, according to HLB Mann Judd Sydney restructuring and risk advisory partner, Todd Gammel.
Mr Gammel said the local market has entered a period where many insolvencies are the result of a fraudulent and inflexible structure, particularly within the property and construction sector.
“Things are starting to fall over. The stereotypical problem is real estate development where a builder has a loan and churns through money, but is only 70 to 75 per cent through the build. The cost of labour and materials have increased increasing the costs, developers can then lose confidence and one or all of the parties take advice around their respective positions and options from restructuring experts, lawyers and the like.
“Historical fixed price contracts are continuing to cause headaches but fortunately there is increasing willingness to explore options on how to complete projects without formal insolvency processes if they can be avoided. Notwithstanding, unless the parties can come to a commercial financial agreement, they’re collapsing and will continue to do so in this inflationary environment,” he said.
Mr Gammel said another segment of the market which is suffering under the weight of inflation is early-stage businesses which, until recently, were popular with investors.
“These businesses were more popular with funding during COVID when interest rates were zero, but now, there is infinitely less willingness to explore some of these businesses.
“The environment for earlier-stage growth prospects has gone south and a lot of them are being wound down – why would you put money into something with uncertainty of material investment return or repayment of the funds,” he said.
Head of Consulting at US-based Rehmann, Chip Hoebeke, agrees, and said the hallmarks of the GFC are again permeating global markets.
“The difference however is the previous recession was an issue of liquidity; now, it resembles a more traditional recession.
“In 2007/08, we had the tech company layoffs, real estate pressures, banking receiverships, and we’re starting to follow a very similar pattern now, both in the US and Australia.
“All of those fingerprints have re-emerged. The government is trying to fend it off through inflation but there’s conjecture as to whether that’s the right way. We’ve been in catch up mode and rate rises are biting hard,” he said.
Rehmann is a member firm to HLB International, a global network of accounting and business advisory firms, and Mr Hoebeke is currently in Australia raising awareness of the Cayman Islands Restructuring Officer regime.
The legislation – which has been in effect since August last year – will allow a debtor to seek the appointment of a restructuring officer who will supervise a company’s restructuring process, including in any formal court proceedings.
Mr Hoebeke said while the legislation is yet to be tested, the likelihood of forthcoming insolvencies could see it utilised by Asia Pacific investors, funds and creditors.
“It will prove to be an extraordinarily useful tool to help creditors recover money in times of trouble. In utilising this legislation, an Australian creditor, for example, has a say in how the process will happen and the potential means of extracting money.
“In times of global uncertainty, when investment structures are under pressure, the new regime is a way to manage the process efficiently and fairly without damaging the underlying assets,” he said.
