Corporate and personal insolvencies have declined to record low levels following the implementation of COVID-induced temporary protections, according to the 2021 AICM Risk Report.

Drawing on data insights and the AICM’s network of credit industry professionals and thought-leaders, the report reviews both personal and corporate insolvencies in the context of the government’s response to the pandemic.

The dramatic change in conditions is largely contrary to what would be expected given the level of disruption experienced.

Whilst creditors are carrying less delinquent debt than this time last year, their risk outlook continues to rise as we approach the end of government stimuli, such as the JobKeeper initiative, which will stop entering businesses bank accounts in early May.

AICM CEO, Nick Pilavidis says “While we are yet to see significant increases in corporate and personal insolvencies there are signs that individuals are feeling the pressure”. Data from AFSA indicates that personal insolvencies reached a record low point in the fortnight ending 10 January 2021 with a gradual increase in the following fortnights.”

“An unknown factor in assessing the outlook is the level of unviable businesses, businesses that have ceased trading and the number of zombie companies that are out there.”

Daniel Turk, Partner and Head of TurksLegal’s Commercial group says “This is further compounded by an increasingly complex legal landscape with the introduction of legislation to establish the small business restructuring process which affects the rights of recovery of secured creditors

To navigate this uncertainty, the report provides insights from credit professionals who are custodians of cash flow and mitigate credit risk. They recommend focusing on the fundamentals of credit and risk management including:

• Know your customer;
• Understanding industry trends;
• External data and analysing their exposures;
• Thorough risk assessment;
• Direct relationships with customers;
• Sales and organisational intelligence;
• A network of credit professionals across industries and sectors;
• Ensuring records and securities are accurate and up to date.

While many credit providers are in a stable position to manage an increase in risk, they are not able to support every customer that shows signs of cash flow pressures. As delinquencies rise, credit professionals will call on their experience, systems and data to understand which customers are:

• Experiencing short term issues but are engaging with them openly to demonstrate their capacity to return to a viable operation;
• Not engaging with them but require further attention to create engagement and support through to normal trading; and
• Unviable and should be encouraged to enter an insolvency process.

Government insolvency reforms which were implemented on 1 January could have gone a long way in mitigating some of these risks. However, as Mr Pilavidis explains: “The fact that less than 50 businesses have sought refuge through the insolvency measures indicates many businesses are still hiding behind the artificially created business environment. Reports from credit providers suggest there are a significant number of legal enforcement proceedings that commenced in recent weeks so we expect to see this change dramatically throughout Q2.”

Equifax Head of Product and Rating Services, Brad Walters said "While there are many positive signs highlighting business resilience, we also see signs of increasing financial stress across small and medium businesses at a time where JobKeeper and other temporary insolvency protections have, or are being phased out. Winter is coming, don't get bitten by zombie companies. Now is the time to double down on credit risk fundamentals".

Extraordinary resilience during the pandemic

CreditorWatch CEO, Patrick Coghlan adds “It’s not all doom and gloom - Australia has set the standard in handling the pandemic. In the middle quarters of 2020, the adverse impacts from COVID-19 were projected to be much worse than what has eventuated so far.”

“We’ve seen extraordinary resilience from many of Australia’s key industries to not just stay afloat during 2020, but adapt and thrive. Insolvency numbers must now rise so we can get back to at least pre-COVID administration levels and away from the synthetic environment, we've lived in for the past 12 months. No one knows quite what to expect but I’m confident creditors can weather the storm to come out leaner, meaner, more efficient and more creative than ever before.”

illion CEO, Simon Bligh notes that despite the doom and gloom of the pandemic, localism, online and new consumer behaviours all headlined strong new business growth last year. “More than four new businesses were established for every one that closed in a pandemic-led 2020 as Australians were driven online and became more emotionally connected to provenance and localism trends in their shopping and consumption behaviours.”

Mr Pilavidis concludes, “While uncertainty remains high, solutions can be found by keeping a focus on the fundamentals skills of a credit professional, understanding your customer, understanding your industry and ensuring records and securities are accurate and up to date. With this in place and access to legal, insolvency and debt collection experts, Australia’s businesses landscape will be able to move forward and surface better than expected several months ago.”

The full report can be found here.

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