CreditorWatch delivers its verdict
Trade receivables and credit enquiries were lower in June, indicating business confidence has reached a turning point, CreditorWatch says.
The credit agency continues to expect business insolvencies and default rates to rise this year, in line with the worsening economic outlook. The situation is exacerbated by inflationary pressures, interest rate rises, increasing COVID-19 cases and subsequent labour shortages, it said.
The June 2022 CreditorWatch Business Risk Index (BRI) shows average trade receivables, the amount owed to a business by its customers following the sale of goods or services on credit, dropped 18% year-on year. A leading indicator of increasing business activity, credit enquiries dipped month-on-month, but remained up 8% year-on-year.
Trade payment defaults, an indicator of rising insolvencies, increased 18% year-on-year, reflecting a slight decline in the NAB Business Confidence Index.
Read more: Trade activity improves but inflation, rate rises a threat
CreditorWatch CEO Patrick Coghlan (pictured above left) said the latest BRI data indicated businesses could be in for a “softer” second half of 2022.
“We continue to see a disturbing rise in trade payment defaults, our leading indicator for future business insolvencies,” Coghlan said. “Court actions are also back to pre-COVID levels, reflecting that the banks are back to their regular collection activity after the ‘loan holidays’ that they provided during the peak of the pandemic.”
CreditorWatch will monitor upcoming data to see if the figures indicate an inflection point in business confidence, as conditions worsen, he said.
The BRI, which ranked over 300 regions by relative insolvency risk based on data from around 1.1 million ASIC-registered credit-active businesses, shows the national probability of default remains flat at 5.8%.
Merrylands - Guildford in NSW appears to be the most at-risk region, with a probability of default of 7.78%.
The five regions most at risk of default over the next 12 months are:
- Merrylands - Guildford (NSW): 7.78%
- Canterbury (NSW): 7.55%
- Surfers Paradise (QLD): 7.49%
- Auburn (NSW): 7.40%
- Ormeau - Oxenford (QLD): 7.32%
The five regions at least risk of default over the next 12 months are:
- Cottesloe - Claremont (WA): 4.91%
- Adelaide City (SA): 4.96%
- Yarra Ranges (VIC): 5.01%
- Ku-ring-gai (NSW): 5.02%
- Chatswood-Lane Cove (NSW): 5.10%
Industries to watch in 2022 in terms of probability of default include food and beverage services, arts and recreation services, transport, postal and warehousing.
The industries considered as posing the lowest probability of default over the next 12 months include healthcare and social assistance, agriculture, forestry and fishing, and manufacturing.
As inflation and interest rate rises started to hit businesses, debt collection activity has returned to pre-COVID levels, CreditorWatch said.
In addition to supply chain disruptions and labour shortages, the cost of materials has increased and COVID-related government support packages have ended, putting businesses that were already struggling to keep the lights on, under the pump. Trade receivables and credit enquiries were down in the June BRI, indicating confidence levels were at a turning point. This was reinforced by the May NAB Business Confidence Survey, which showed a decline in decline in business confidence, the index falling by 4pts to 6pts. “The June BRI data revealed that court actions and external administrations are both at their highest rate since March 2020, indicating that lenders offering loan holidays during the pandemic have resumed collection activity. The downward trend is currently minimal as it will take a few months for the unique blend of economic risk factors to fully hit businesses, but momentum has certainly shifted,” CreditorWatch said.
On average, business default rates are rising in Australia, and CreditorWatch said it expects defaults to peak around 5.8% over the next 12 months.
“We note that there is upside risk to this forecast, as we won’t see the full impact of interest rate rises, plus higher labour costs, until around October or November,” Coghlan said.
CreditorWatch chief economist Anneke Thompson (pictured above right) said while Australian businesses were operating at record capacity levels and business conditions remained slightly better than the long-term average, the June data pointed to the start of a deterioration in business conditions.
“Businesses will be increasingly wary of their credit customers and their ability to pay going forward, even if no problems have arisen to this point,” Thompson said. “Businesses in the growth phase, who require equity or debt for growth, may now see these lines of funding get increasingly more difficult to source.”
Read more: Supply chain backlogs boost invoice demand - NAB
Court actions were at their highest point since March 2020, before the onset of the COVID-19 pandemic, indicating lenders had resumed their regular collection activity.
