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Surrender or survive: Businesses face their biggest test yet as stimulus fades

Like many businesses, the federal government’s announcement of its $70 billion JobKeeper scheme on March 30 was a huge relief for Simson, with the stimulus package providing much-needed certainty for her and her staff.

But with new infection waves and significant revisions and restrictions announced to the life-saving stimulus package this week, the temporary air of stability has all but disappeared.

In some respects what the government has done is the easy bit. The really challenging bit for the government now is unwinding it.

KPMG’s James Stewart

Businesses big and small now face an uncertain future as support measures begin to fall away and lenders start to have the “hard conversations” with their struggling clients.

And against this perilous backdrop, the government faces its own delicate balancing act of supporting the economy in a massive crisis, yet gradually withdrawing support so more firms can stand on their own two feet.

Middle of the pack punished for success

Though the government’s extension of JobKeeper has been widely praised in business circles, some in the financial markets have their doubts. Pengana Capital fund manager Amy Pham is worried the revised eligibility criteria for the package could leave some companies victims of their own success.

Unlike the first tranche of JobKeeper, firms applying for the stimulus in September will be required to show an actual 30 or 50 per cent decline in revenue, rather than just projected, meaning those who traded above expectations during the shutdown could find themselves ineligible.

This move will disproportionately affect middle-of-the-pack businesses that were doing neither well nor poorly prior to the pandemic, Pham believes. “The companies doing okay before COVID-19 might not be able to ride this second wave. Once this cutback comes in, reality is going to hit for a lot of those companies,” she says.

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“That’s going to be the test of whether the government has cut the stimulus too fast, and if the economy’s not able to wear the shock.”

Treasury’s review of the JobKeeper scheme in June showed that 920,000 organisations had signed up for the subsidy, primarily in the travel, hospitality, arts and retail sectors, which have been the most affected by COVID-19.

This includes major listed companies such as Myer, Flight Centre and Premier Investments, each of which have signed up thousands of workers on to the scheme.

Flight Centre chief executive Graham Turner told the ABC this week approximately 5000 of his employees were using the scheme, netting the struggling company about $60 million in subsidies.

More than zombies

Those middling businesses described by Pham are separate from walking dead ‘zombie’ companies which have been propped up only by the government’s extraordinary measures to shield the economy – such as deferred loan payments or a temporary exemption from insolvent trading laws for directors.

There will be some companies that won’t survive this and I think to think otherwise is very naive.

ANZ deputy chief executive Alexis George

Zombie businesses are ones that were struggling prior to the pandemic, KPMG’s joint national leader of restructuring services James Stewart says, who shies away from using the term because of how it depersonalises the human impacts of companies folding.

Even so, Stewart, who has worked in insolvency during economic crises going back to the 1980s, acknowledges that the next phase of taking companies off life support will inflict a tough toll on many businesses, some of which will not survive.

“In some respects what the government has done is the easy bit. The really challenging bit for the government now is unwinding it, because people are not going to like it,” Stewart says.

“It will not be without economic bruising, it will not be without challenges for many businesses, and it will inevitably mean some businesses may not survive on the other side.”

He agrees the scaling back of JobKeeper will create pressure for the many companies that will just fall short of the new, tougher eligibility criteria. “Many businesses that we’ve seen in COVID have done a remarkable job in winding back their cost base. The question will be how sustainable will it be to keep that cost base wound down, keeping in mind that the biggest fixed cost for many businesses is rent,” he says.

Banks strike up ‘hard conversations’

Against such a challenging economic backdrop, both the government and banks are warning that rescue packages cannot save everyone. Indeed, economists say one way of boosting productivity in the long term is allowing capital and labour to move to more productive uses, which also involves allowing companies to fold.

As Treasurer Josh Frydenberg told The Australian Financial Review earlier this month: “We do not want to perpetuate zombie firms.”

Without referring to ‘zombie firms’ directly, the federal Treasury this week said that unlike what normally happens in a recession, the number of companies folding has fallen rather than risen, as stimulus measures help languishing businesses struggle on. In May company insolvencies were 38 per cent lower than the same month last year.

ANZ deputy chief executive Alexis George.

ANZ deputy chief executive Alexis George.Credit:Alex Ellinghausen

Yet this will surely change as the crisis drags on and support is withdrawn. Banks, which have deferred $56 billion in small business loans, are already having what bankers call “hard conversations” with clients, including about pulling the plug.

ANZ deputy chief executive Alexis George says that although the latest government version of JobKeeper may last until March, it is not in the interests of the bank or the borrower for a struggling business to delay making a decision about its future and keep racking up debt.

“There will be some companies that won’t survive this and I think to think otherwise is very naive,” George says.

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She says what is best for a borrower will depend on their individual circumstances. It might be more credit, it could be a further deferral of repayments, or it could be for the company to fold. But she says that if a business is entirely dependent on government support for their revenue, “then clearly hard conversations have to be had”.

“I think most companies get to that reality themselves, but there are some that require that hard conversation – looking to the future, what does this really mean? Maybe that business model wasn’t going to survive anyway,” George says.

It is not only bank debt that is building up as companies attempt to survive through the carnage of COVID-19. Many operators are also deferring their rent, payments to suppliers, or other money owed to creditors.

Judo Bank chief executive Joseph Healy estimates that if you add all these up, Australian companies could face $40 billion in liabilities by March when the latest tranche of government assistance expires.

“These things are not disappearing, they’re accumulating, so what you’ll find is that at the end of March there will be a mountain of unplanned and unproductive liabilities,” he says.

The specialist business bank is assuming COVID-19’s impact will linger until at least June next year, Healy says. “We are taking a 12-month view on this and we’re looking at each business saying how can you survive through the next 12 months?”

But even with a 12-month window, market-watchers are still concerned the state of play will still be far too distorted for directors and investors to get a true read on how their businesses are faring.

Heightened spending from stimulus and the government’s early super withdrawal scheme will play a part in this distortion, but so too will more abstract measures such as consumer sentiment, as the deferred economic reality provides consumers with a sense of false hope.

Analysts have already begun to direct shareholders to ignore profit figures for both the 2020 and 2021 financial years, saying “true” underlying company performance won’t be able to be gauged until fiscal 2022.

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Like being “knocked on your arse”

Georgina McEncroe, the founder of women-only ridesharing company Shebah, had started to see business return in the month between Victoria’s first and second lockdown.

But when the second six-week stay-at-home order was put in place, she felt like her business had been “knocked on its arse”, leaving her back at square one.

“We did a strategic plan in May thinking things were going to get a bit better, and we had plans for some big events in October. That’s all gone now,” McEncroe says.

“And you worry, is JobKeeper going to get taken away? I know the government’s making best endeavours but the lack of certainty is anxiety-provoking for us.”

Shebah founder George McEncroe says businesses will have to adjust to living with uncertainty.

Shebah founder George McEncroe says businesses will have to adjust to living with uncertainty.Credit:Joe Armao

For business owners like McEncroe the next 12 months holds both opportunity and difficulty, but the entrepreneur has shied away from any longer-term strategic plans for the moment.

“Right now we’re just learning to live with the uncertainty, and that’s what we all just have to do,” she says.

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