The number of Australian companies at risk of financial distress or insolvency is on the rise, according to a report issued by Dun & Bradstreet yesterday.
D&B reported that the number of companies rated moderate or very high risk of insolvency was at its highest level in 18 months, with 37.8% of companies in one of those categories.
According to D&B, high interest rates and inflationary pressure are having an impact. The group’s director of marketing, Chris Gray, said: “We see companies having to deal with higher costs. The ones that are able to pass on those costs are facing slower sales. The ones that can’t are having their margins squeezed.”
The findings of the report are based on risk scoring of 350,000 companies in the D&B database. Scores are based on criteria such as whether the number of days taken to make trade payments has increased, whether a director of the company has been involved with a failed business previously, and whether the company has faced court action over payments.
“Trade payment days have gone from an average of 48 days in 2004 to 55.5 days now,” Gray said. “They got to 63 days in 2000 – a year when we were close to recession.”
D&B’s findings are at odds with the very benign view of the credit quality of business borrowers presented by ANZ in its annual results presentation last week. The bank reported that its provisions on its business loan book were as low as they had ever been. Corporate and institutional loan defaults had declined markedly.
“ANZ is only looking at its own book,” Gray said. “Ours is a much wider survey. And ANZ is reviewing past performance. We use our scoring to get a picture of what is likely to happen in 12 months.”
National Australia Bank’s September quarter business survey also suggests a gloomy outlook. It found that, while current conditions were sound, business confidence had fallen and investment intentions were weakening. If mining companies were excluded, business investment had come to a standstill.
The factors behind the fall in confidence were higher interest rates and higher costs, weaker forward orders and a shortage of skilled workers.
NAB chief economist Alan Oster said: “Recent increases in interest rates have significantly eroded confidence.”
One curious finding from the D&B survey was that Western Australia and Queensland, the boom states, were areas where businesses were more at risk. “In both those states there is a lot of wage pressure,” Gray said.
“The mining boom is really quite concentrated if you think about the number of companies that are profiting from it. Right now in those states you have a lot of small explorers, whose ventures are high risk.
“The other factor affecting Queensland is its relatively high involvement in agriculture.”
The industries most at risk were mining and agriculture. Those least at risk were services and retail and wholesale trade. Small companies were more at risk than big ones.