1 00:00:04,050 --> 00:00:07,140 Adam Lang: Welcome to the Fear & Greed Daily Interview. I'm Adam Lang. 2 00:00:07,620 --> 00:00:09,840 Adam Lang: In the first couple of years of the pandemic, the 3 00:00:09,840 --> 00:00:14,550 Adam Lang: number of businesses in insolvency hit new lows. Now, this 4 00:00:14,550 --> 00:00:17,579 Adam Lang: was largely because of the influx of government funding that 5 00:00:17,579 --> 00:00:21,299 Adam Lang: saw businesses propped up, some well beyond the point at 6 00:00:21,300 --> 00:00:25,320 Adam Lang: which they have normally collapsed. But with insolvency levels now 7 00:00:25,320 --> 00:00:29,580 Adam Lang: rising, could we be seeing a correction? KordaMentha and the 8 00:00:29,580 --> 00:00:34,650 Adam Lang: Turnaround Management Association of Australia have released their annual Turnaround 9 00:00:34,650 --> 00:00:38,370 Adam Lang: Survey, looking at the business environment in Australia and the 10 00:00:38,370 --> 00:00:41,970 Adam Lang: outlook ahead. Over the last couple of years, we've spoken 11 00:00:41,970 --> 00:00:45,839 Adam Lang: to James Wagg, executive director KordaMentha, each time the report 12 00:00:45,840 --> 00:00:48,000 Adam Lang: is released. And I'm delighted to say James is back 13 00:00:48,000 --> 00:00:50,070 Adam Lang: with us. James, welcome back to Fear & Greed. 14 00:00:50,520 --> 00:00:51,570 James Wagg: Thanks very much, Adam. 15 00:00:52,140 --> 00:00:55,470 Adam Lang: So how accurate were the predictions from last year? 16 00:00:55,710 --> 00:00:59,250 James Wagg: Looking back, last year, the prediction was that there would 17 00:00:59,250 --> 00:01:02,100 James Wagg: be a downturn, but there'd be a lot more uncertainty 18 00:01:02,100 --> 00:01:06,449 James Wagg: in 2022. And that certainly has occurred. When we looked 19 00:01:06,450 --> 00:01:09,600 James Wagg: back, we pointed at the end of government stimulus, and 20 00:01:09,600 --> 00:01:14,400 James Wagg: border closures, as really reasons that external administration appointments in 21 00:01:14,400 --> 00:01:18,240 James Wagg: corporate distress would start to trend upwards from historically low 22 00:01:18,240 --> 00:01:22,110 James Wagg: levels. And that has been the case. And what we 23 00:01:22,110 --> 00:01:26,429 James Wagg: see now is the economy facing enormous pressures, with inflation 24 00:01:26,430 --> 00:01:31,350 James Wagg: at 7%. A cash rate that's increased 275 basis points 25 00:01:31,709 --> 00:01:35,190 James Wagg: in six months, and house prices that have fallen 10% 26 00:01:35,190 --> 00:01:40,260 James Wagg: in some states. But, countering that, we're still seeing a 27 00:01:40,260 --> 00:01:45,180 James Wagg: very resilient, strong economy. Consumers are still cashed up and 28 00:01:45,180 --> 00:01:48,780 James Wagg: working through the COVID buffers that they have accumulated over 29 00:01:48,810 --> 00:01:53,190 James Wagg: the prior two years. And businesses are doing really well. 30 00:01:53,190 --> 00:01:57,480 James Wagg: They're continuing to see strong demand and deliver good results. 31 00:01:57,780 --> 00:02:01,380 Adam Lang: So, James, in that context, are we now seeing businesses 32 00:02:01,380 --> 00:02:03,870 Adam Lang: that should have shut down a couple of years ago, 33 00:02:04,320 --> 00:02:05,970 Adam Lang: actually now reaching that point? 34 00:02:06,300 --> 00:02:10,139 James Wagg: We're certainly starting to see that come through in the external 35 00:02:10,139 --> 00:02:14,609 James Wagg: administration data provided by ASIC. So what we saw is, 36 00:02:14,880 --> 00:02:18,840 James Wagg: it's been well reported that corporate insolvencies and external administrations 37 00:02:18,840 --> 00:02:23,160 James Wagg: were about 50% down, or have been 50% down, for 38 00:02:23,160 --> 00:02:27,690 James Wagg: the last two years on 2019 levels. Now, that trend 39 00:02:27,690 --> 00:02:33,149 James Wagg: started to unwind in April, and it's continued since then. 40 00:02:33,419 --> 00:02:38,250 James Wagg: However, we are still well below the 2019 levels of 41 00:02:38,250 --> 00:02:41,940 James Wagg: external administrations, so there's still some way to go to 42 00:02:41,940 --> 00:02:44,190 James Wagg: get back to a more normalized result. 43 00:02:44,880 --> 00:02:49,680 Adam Lang: And, James, government support was withdrawn some time ago. What 44 00:02:49,680 --> 00:02:53,669 Adam Lang: role is the ATO having in the number of insolvencies 45 00:02:53,669 --> 00:02:54,180 Adam Lang: at the moment? 46 00:02:54,720 --> 00:02:57,929 James Wagg: The ATO is playing an enormous role in the current 47 00:02:57,960 --> 00:03:01,470 James Wagg: uptick, and there's a couple of reasons behind that. The 48 00:03:01,470 --> 00:03:06,570 James Wagg: first one is that the ATO, effectively, stopped pursuing business 49 00:03:06,570 --> 00:03:10,110 James Wagg: debts over COVID. And that provided a shadow form of 50 00:03:10,110 --> 00:03:14,639 James Wagg: stimulus to businesses to get through that difficult period. And 51 00:03:14,639 --> 00:03:20,160 James Wagg: that transpired into the ATO's business book debt doubling from 52 00:03:20,250 --> 00:03:24,510 James Wagg: June 2020 to June 2021, to peak at some $ 55 53 00:03:24,510 --> 00:03:29,490 James Wagg: billion. Now, the biggest change, between April this year and 54 00:03:29,490 --> 00:03:33,150 James Wagg: prior years, has been the ATO starting to enforce on 55 00:03:33,150 --> 00:03:37,050 James Wagg: those debts. And we're seeing the ATO issue directors' penalty 56 00:03:37,050 --> 00:03:40,740 James Wagg: notices at rates that haven't been seen since the GFC. 57 00:03:41,310 --> 00:03:45,120 James Wagg: And that is what is driving the current, or the 58 00:03:45,120 --> 00:03:47,760 James Wagg: main driver, I should say, of the current rise in 59 00:03:47,760 --> 00:03:51,300 James Wagg: insolvencies, which has been primarily seen in the small to 60 00:03:51,300 --> 00:03:53,640 James Wagg: medium business enterprise space. 61 00:03:54,300 --> 00:03:57,930 Adam Lang: And that's playing out right now. So alongside that, are 62 00:03:57,930 --> 00:04:01,500 Adam Lang: you still seeing some leniency being provided by banks? 63 00:04:02,220 --> 00:04:05,370 James Wagg: Absolutely, we are. It's fair to say that the big 64 00:04:05,370 --> 00:04:11,430 James Wagg: banks especially are continuing to work with customers on solutions 65 00:04:11,430 --> 00:04:15,930 James Wagg: outside of a formal insolvency process, rather than go down 66 00:04:15,930 --> 00:04:20,580 James Wagg: an enforcement path. That was absolutely a finding that received 67 00:04:21,000 --> 00:04:24,960 James Wagg: general consensus from the respondents in the survey, that that 68 00:04:24,960 --> 00:04:27,000 James Wagg: trend would continue into the near future. 69 00:04:27,540 --> 00:04:35,910 Adam Lang: Stay with me. We'll be back in a minute. I'm 70 00:04:35,910 --> 00:04:41,190 Adam Lang: speaking to James Wagg, executive director at KordaMentha. So let's 71 00:04:41,190 --> 00:04:45,060 Adam Lang: look at some of the individual insolvency pressures on business. And by 72 00:04:45,060 --> 00:04:49,380 Adam Lang: that I mean input costs, for example. They've risen sharply 73 00:04:49,440 --> 00:04:53,520 Adam Lang: in some instances. How much is input costs weighing on 74 00:04:53,520 --> 00:04:54,750 Adam Lang: companies that you're seeing? 75 00:04:55,140 --> 00:04:58,589 James Wagg: Rising input costs is one of many factors that are 76 00:04:59,490 --> 00:05:03,599 James Wagg: placing pressure on companies. To date, companies have been able 77 00:05:03,600 --> 00:05:06,540 James Wagg: to deal with rising input costs by passing that cost 78 00:05:06,540 --> 00:05:11,729 James Wagg: onto consumers. Now, the longevity of that tactic is unknown, 79 00:05:11,730 --> 00:05:13,919 James Wagg: and that's something that will play out over the next 80 00:05:13,920 --> 00:05:17,430 James Wagg: 12 months. How much can consumers actually take in a 81 00:05:17,730 --> 00:05:22,289 James Wagg: rising interest rate and high inflation economy? I think the 82 00:05:22,290 --> 00:05:26,099 James Wagg: biggest pressures on businesses are well known, well reported, and 83 00:05:26,100 --> 00:05:29,909 James Wagg: were confirmed via the survey. So they were input costs, 84 00:05:29,910 --> 00:05:35,160 James Wagg: inflation, supply chain. But, also, workforce attraction and retention. I 85 00:05:35,160 --> 00:05:38,130 James Wagg: think, though, that for the first time, there was the 86 00:05:38,130 --> 00:05:42,510 James Wagg: emergence of cybersecurity as a risk to businesses and a 87 00:05:42,510 --> 00:05:47,370 James Wagg: pressure on businesses. And some 15% of respondents actually noted 88 00:05:47,370 --> 00:05:50,640 James Wagg: it as, not just an emerging, but a significant issue 89 00:05:51,000 --> 00:05:55,440 James Wagg: and pressure to businesses. And the interesting point in that is that the 90 00:05:55,440 --> 00:05:59,219 James Wagg: survey was conducted before Optus and Medibank hit the press. 91 00:06:00,120 --> 00:06:04,890 James Wagg: So just some quick stats. In 2022, the average cost 92 00:06:04,890 --> 00:06:07,410 James Wagg: of a cyber breach had grown to some $ 4. 2 93 00:06:07,410 --> 00:06:13,020 James Wagg: million. But that's set to increase markedly in the coming 94 00:06:13,020 --> 00:06:16,529 James Wagg: years with tighter legislation and the growing likelihood of class 95 00:06:16,529 --> 00:06:19,260 James Wagg: actions that we're starting to see play out with those 96 00:06:19,260 --> 00:06:20,040 James Wagg: two examples. 97 00:06:20,940 --> 00:06:25,140 Adam Lang: That's a staggering increase. Let's just go back onto those 98 00:06:25,140 --> 00:06:28,860 Adam Lang: workforce challenges at the moment: retaining staff, finding new workers. 99 00:06:28,860 --> 00:06:32,550 Adam Lang: We know it's a low unemployment environment. Cost of employing 100 00:06:32,550 --> 00:06:34,979 Adam Lang: people is going up. Are you seeing any areas where 101 00:06:34,980 --> 00:06:37,620 Adam Lang: that pressure is most acute and, perhaps, where it's not? 102 00:06:38,250 --> 00:06:43,289 James Wagg: The really interesting thing with this market is that the 103 00:06:43,290 --> 00:06:48,780 James Wagg: workforce pressures are being felt everywhere. There's no isolated pockets 104 00:06:48,810 --> 00:06:52,229 James Wagg: where it's bad and where it's good. It's being felt 105 00:06:52,230 --> 00:06:55,799 James Wagg: in all industries. You'll see in the press recently, there's 106 00:06:55,800 --> 00:06:59,040 James Wagg: been a lot of publicity around aged care and workforces, 107 00:06:59,040 --> 00:07:03,659 James Wagg: and huge increases for aged care workers. But that's one 108 00:07:03,660 --> 00:07:07,410 James Wagg: isolated example. It's being seen absolutely everywhere. 109 00:07:07,920 --> 00:07:11,610 Adam Lang: So in terms of supply chain, we've learned to live 110 00:07:11,610 --> 00:07:14,400 Adam Lang: with supply chain issues. Some of them are breaking through, 111 00:07:14,400 --> 00:07:16,350 Adam Lang: some of them are not. These have been around for 112 00:07:16,350 --> 00:07:18,870 Adam Lang: a few years now. So are you finding that businesses 113 00:07:18,870 --> 00:07:21,989 Adam Lang: are starting to adapt and learning to live with those 114 00:07:21,990 --> 00:07:23,160 Adam Lang: supply chain pressures? 115 00:07:24,210 --> 00:07:29,130 James Wagg: Absolutely. And over the last two years, business resilience plans 116 00:07:29,190 --> 00:07:34,080 James Wagg: have been tested and refined over and over. And businesses 117 00:07:34,170 --> 00:07:38,580 James Wagg: are remarkably resilient and adept to dealing with these supply 118 00:07:38,580 --> 00:07:42,810 James Wagg: chain issues. So whilst they still exist in the economy 119 00:07:42,810 --> 00:07:46,260 James Wagg: and businesses are by no means out of the woods, 120 00:07:46,830 --> 00:07:51,000 James Wagg: we're seeing it being reported as lower and lower of a business 121 00:07:51,000 --> 00:07:56,130 James Wagg: risk, as companies are able to adapt well to changes. 122 00:07:56,730 --> 00:08:00,810 Adam Lang: Oh, that's encouraging. So in terms of sectors, where do 123 00:08:00,810 --> 00:08:03,780 Adam Lang: you expect the pressure to be most felt in the 124 00:08:03,780 --> 00:08:05,880 Adam Lang: next 12 months? Which sectors do you think are going 125 00:08:05,880 --> 00:08:08,250 Adam Lang: to be facing the biggest challenges? And, perhaps, some that 126 00:08:08,250 --> 00:08:10,530 Adam Lang: are starting to break through and get some tailwinds? 127 00:08:10,800 --> 00:08:14,940 James Wagg: So another really interesting symptom of the current environment is, 128 00:08:15,030 --> 00:08:19,290 James Wagg: it's really widespread where the distress is being seen. So, 129 00:08:19,290 --> 00:08:22,890 James Wagg: again, there has been a lot of focus on real 130 00:08:22,890 --> 00:08:26,610 James Wagg: estate and construction. And there's been some high profile failures 131 00:08:26,790 --> 00:08:31,050 James Wagg: in that industry over recent times. And we dare say 132 00:08:31,050 --> 00:08:33,960 James Wagg: that there will continue to be distress in that industry 133 00:08:33,960 --> 00:08:38,490 James Wagg: going forward. You can certainly see that businesses that have 134 00:08:38,730 --> 00:08:42,960 James Wagg: traded on multiples of revenue, rather than EBITDA or profit, 135 00:08:43,320 --> 00:08:47,820 James Wagg: those businesses that aren't cashflow positive have really felt the brunt of the 136 00:08:48,720 --> 00:08:52,320 James Wagg: reset in the markets over the last few months. And 137 00:08:52,320 --> 00:08:56,820 James Wagg: will continue to, over the next year. However, those examples, 138 00:08:56,820 --> 00:09:00,929 James Wagg: be it construction or the tech sector, are just two 139 00:09:00,960 --> 00:09:05,790 James Wagg: isolated examples that receive press. What we're seeing is that 140 00:09:06,030 --> 00:09:12,000 James Wagg: distress is not isolated, it's starting to be seen everywhere in the market. 141 00:09:12,660 --> 00:09:15,300 Adam Lang: In terms of looking ahead, and the benefits of the 142 00:09:15,300 --> 00:09:17,280 Adam Lang: report, and how you can apply them to what's ahead 143 00:09:17,280 --> 00:09:20,640 Adam Lang: of us, and the predictions for this coming year. I 144 00:09:20,640 --> 00:09:25,230 Adam Lang: noticed the report considers the potential for more distressed mergers 145 00:09:25,230 --> 00:09:28,829 Adam Lang: and acquisition activity as well, as an alternative to formal 146 00:09:28,830 --> 00:09:31,770 Adam Lang: restructuring. Are you starting to see signs of that? 147 00:09:32,550 --> 00:09:37,470 James Wagg: Absolutely. And it's probably the area where respondents most agreed, 148 00:09:37,590 --> 00:09:42,059 James Wagg: was that the most common response to distress by lenders 149 00:09:42,059 --> 00:09:45,030 James Wagg: and owners will be to explore options outside of formal 150 00:09:45,030 --> 00:09:48,719 James Wagg: insolvency. How this is likely to play out in practice 151 00:09:48,720 --> 00:09:52,079 James Wagg: is lenders are selling debt, and businesses are raising new 152 00:09:52,080 --> 00:09:55,530 James Wagg: equity at discounts. And I guess the biggest challenge for 153 00:09:55,530 --> 00:09:58,920 James Wagg: these transactions in the medium term is a lack of 154 00:09:58,920 --> 00:10:03,929 James Wagg: confidence in valuations. With the business terrain getting more and 155 00:10:03,929 --> 00:10:08,280 James Wagg: more challenging by the day, getting confidence in forecasts is 156 00:10:08,280 --> 00:10:12,750 James Wagg: becoming increasingly difficult. So that's leading to more risk being 157 00:10:12,750 --> 00:10:17,850 James Wagg: priced into models, and lower valuations from purchases. So I 158 00:10:17,850 --> 00:10:22,590 James Wagg: guess the challenge will be, where vendors and purchasers have 159 00:10:22,590 --> 00:10:25,589 James Wagg: material differences in their valuations of assets, it's going to 160 00:10:25,590 --> 00:10:29,579 James Wagg: be very difficult for a transaction to proceed. And in 161 00:10:29,580 --> 00:10:32,939 James Wagg: that event, that's when it will lead to a formal 162 00:10:32,940 --> 00:10:37,530 James Wagg: insolvency solution. However, there are many solvent solutions outside of 163 00:10:37,530 --> 00:10:39,179 James Wagg: that which will be pursued. 164 00:10:39,690 --> 00:10:43,950 Adam Lang: So, James, two final questions. The first of which is, 165 00:10:44,610 --> 00:10:47,790 Adam Lang: as you're looking ahead for this next 12 months, what 166 00:10:47,790 --> 00:10:49,080 Adam Lang: are you most excited about? 167 00:10:49,800 --> 00:10:55,860 James Wagg: I'm most excited working for companies with an opportunistic view 168 00:10:55,860 --> 00:10:59,940 James Wagg: over the next 12 months. So with a normalization, not 169 00:10:59,940 --> 00:11:03,660 James Wagg: a cliff, but a normalization in conditions, there will create 170 00:11:03,660 --> 00:11:07,920 James Wagg: an enormous amount of opportunities for businesses looking to organically 171 00:11:08,309 --> 00:11:13,020 James Wagg: or strategically grow. The businesses that are really well placed to execute 172 00:11:13,020 --> 00:11:16,260 James Wagg: on these plans over the next 12 to 24 months 173 00:11:16,590 --> 00:11:19,500 James Wagg: are the ones that have really reassessed what their core 174 00:11:19,500 --> 00:11:23,190 James Wagg: business is. What their strength is, and reset their business 175 00:11:23,190 --> 00:11:27,479 James Wagg: over the last two years. So they've laid really strong 176 00:11:27,480 --> 00:11:31,200 James Wagg: foundations, and they're ready to grow and move in this 177 00:11:31,200 --> 00:11:32,160 James Wagg: turbulent time. 178 00:11:32,460 --> 00:11:35,580 Adam Lang: That's great advice, James. And as you consider this Turnaround 179 00:11:35,580 --> 00:11:39,120 Adam Lang: Survey, and for the audience listening now, what are some 180 00:11:39,120 --> 00:11:41,760 Adam Lang: of the key things for them to remember if they're 181 00:11:41,760 --> 00:11:45,030 Adam Lang: feeling that pressure? And what to do about it and when? 182 00:11:45,540 --> 00:11:50,100 James Wagg: Really simply, there's three tips. Cash is king in this 183 00:11:50,100 --> 00:11:52,500 James Wagg: industry, so make sure you do whatever you can to 184 00:11:52,500 --> 00:11:57,240 James Wagg: maximize it. Secondly is seek help from those around you. 185 00:11:57,510 --> 00:11:59,819 James Wagg: A problem shared is a problem halved, and this is 186 00:11:59,820 --> 00:12:03,270 James Wagg: a really serious, challenging time on all people dealing with 187 00:12:03,270 --> 00:12:08,429 James Wagg: businesses. And, thirdly, act early. So by acting early, you'll 188 00:12:08,429 --> 00:12:12,420 James Wagg: give yourself the most optionality to work out a solution 189 00:12:12,420 --> 00:12:14,160 James Wagg: outside of a formal insolvency. 190 00:12:14,940 --> 00:12:17,760 Adam Lang: James, that's great advice. Thank you very much for talking 191 00:12:17,760 --> 00:12:18,900 Adam Lang: to Fear & Greed this morning. 192 00:12:19,590 --> 00:12:20,640 James Wagg: Thanks very much, Adam. 193 00:12:21,179 --> 00:12:25,199 Adam Lang: That was James Wagg, executive director at KordaMentha. This is 194 00:12:25,200 --> 00:12:28,140 Adam Lang: the Fear & Greed Daily Interview. Join us every morning for 195 00:12:28,140 --> 00:12:31,679 Adam Lang: the full episode of Fear & Greed, Australia's most popular business 196 00:12:31,679 --> 00:12:34,709 Adam Lang: podcast. I'm Adam Lang. Enjoy your day.