Insolvency: More insolvency pain to come

Higher interest rates, increased cost of living and reduced credit availability will all contribute to tougher operating conditions for businesses in 2024. In addition to the broader economic indicators, we expect that a more active credit collection environment, in particular from the Australian Tax Office seeking to recover over $30 billion in overdue small business tax, will lead to an elevated level of insolvency appointments.

Total insolvencies in calendar year 2023 exceeded pre-COVID averages by approximately 15%, with December quarterly appointments 30% higher than the corresponding pre-pandemic benchmark. In part, these elevated numbers were driven by a normalisation following artificially low appointment numbers in both 2021 and 2022. However, the factors listed above have also been driving insolvency appointment numbers, many of which we expect to continue.

From an industry perspective, the construction sector led insolvencies in 2023, accounting for around 28% of all appointments in the calendar year. We expect this trend to continue as ongoing margin pressure and delays, coupled with the contagion impact of supply chain failures, hinder activity for small to medium businesses in the sector. We also expect that industries dependent on discretionary spending, such as retail, accommodation and food services, will come under further pressure as consumers close their wallets.

Whilst many of the corporate failures over the last six months have involved small to medium enterprises, we expect that tighter credit conditions may also lead to larger corporates requiring restructuring, in some cases via the voluntary administration process. In particular, we expect that there may be an ‘unwind’ of a number of the private equity-led, highly levered transactions that have taken place over the last few years, where the low-rate environment resulted in excess liquidity.

The outlook for 2024 is that there is more pain to come. As the credit leniency available during, and immediately post the pandemic period dissipates, we will see more businesses in distress. A larger proportion will be unable to solvently restructure as a result of both a decline in liquidity and less support from key stakeholders.