Developer damage

It shouldn’t really be much of a surprise to MacroBusiness readers that I have been expecting to see more flow-on effects of disleveraging. The slow down in the rate of credit issuance for housing has had quite an obvious effect on the government budget and we have also seen a slow down in retail trade. Back in October I mentioned  a report by Dissolve , an Australian company specialising in company liquidation, in which they highlight issues many company’s were facing in the current environment:

• The number of companies entering some form of insolvency administration in calendar year 2011 continues to set new records. The months of March, April, June and now July 2011 have been the highest ever for each of those months. The calendar year to July 2011 is also the highest ever.

• In the year to July 2011 there were 1,355 appointments by Secured Creditors, which will be predominantly Banks appointing Receivers. Again that is the highest number on record.

We believe there are several items of note in the statistics.

Firstly, since the onset of the GFC, the cost of insolvencies to Australian Banks rose very significantly and while it has declined it remains very high. In the financial year ended June 2011 total new bad debts were over $22 billion. Pre-GFC the figure was commonly $4 billion. Further, the June Quarter was an increase on the March quarter so it is remaining stubbornly high.

Secondly, number of insolvency appointments is an indicator of the health of SMEs in Australia and the news is not good. What had been a declining trend through 2010 has turned and 2011 is setting a number of new records.

… banks get tough, creditors delay paying bills and the softening housing market has crunched margins in the sector. All of this has translated into 36 companies in the residential construction sector entering voluntary administration in the past two weeks. A whopping 22 are in New South Wales, three in Victoria and 11 in Queensland. Voluntary administration is often the precursor to liquidation.They follow the collapse of South Australian-based Candetti Constructions, which was placed into administration on Friday with debts of $7 million and Victorian-based Galvin Constructions, which collapsed owing debts of more than $13 million, including a loan of $3.2 million to CBA

….Roger Mendelson, the head of debt collection agency Prushka, who believes it will get worse in the next few months. ”There has been a marked increase in the insolvency of builders and building-related businesses over the last few weeks, particularly in NSW and this is likely to increase after Christmas when contractors have to fund the long slow-down or shut-down period, with little cash flow coming in. With banks being reluctant to increase facilities for building companies, this will only exacerbate the situation.”

The latest housing finance figures released yesterday indicate that the sector is getting hit from all sides, with a sustained period of low housing starts squeezing the margins of builders and contractors.

…One bank said that during the boom it lent 70 per cent of the debt, whereas now it was more likely to lend 50 per cent to 60 per cent, and in terms of pre-sales, they would require 100 per cent of the debt covered by pre-sales, whereas now it was 120 per cent of debt

….Payment trends are known to be an accurate leading indicator of an economic correction. Indeed, the last economic decline was preceded by a blowout in trade payments. The concern is that as the global credit market crunches, and credit availability starts to tighten again, the impact of late payments on cash flow will be devastating in a sector that is already hurting. Residential housing and construction are a key component of the economy and when things go south they have a huge knock-on effect. Things are likely to get worse before they get better.”