A report released by CPA Australia this week found that nearly a third of all ASX-listed companies, including more than half of the lowest 500 companies, faced serious financial uncertainty last year.
CPA analysed nearly 16,000 annual reports from Australian companies between 2005 and 2013 and found that there were more going concern warnings by independent auditors last year than during the global financial crisis.
CPA CEO Alex Malley said the findings showed there had been a steady increase in going concern warnings among the middle and bottom ASX-listed companies since 2011.
“Perhaps most alarmingly, this new research shows that in 2013, those numbers surged, with auditors raising a red flag on more ASX companies than at any time during or following the GFC,” he said.
“We’ve been talking about the potential impacts of the slow-down in China, the strength of the Australian dollar and the effects of the tapering mining boom on the economy for some time.
“Now, this report, compiled based on virtually all companies listed on the ASX, shows these economic factors are being felt across the market and are putting almost a third of ASX-listed companies at risk of financial catastrophe.”
Perhaps unsurprisingly, the worst-affected areas for going concern warnings were the mining and energy sectors.
More than 40% of mining and energy companies were judged to be at risk of collapse last year.
Of the 19 companies suspended by the ASX yesterday for failing to lodge annual accounts, 15 were from the mining and energy space.
It backs up recent research from BDO and Grant Thornton, which highlighted how tough conditions were for miners.
The BDO Explorer Quarterly Cash Update released last month showed that lack of cash had forced more than 10% of companies into hibernation in the June quarter.
Companies that only had enough cash to survive one or two quarters rose to 44% from 42% in the March quarter, with more than a quarter only having enough cash to survive the current quarter, up from the same time last year.
And the 2014 Grant Thornton JUMEX Report released on Monday found that 60% of juniors experienced working capital constraints during the 2014 financial year.
Lack of availability of equity funding was the biggest concern for miners for FY15 for the third year in a row.
Three quarters of junior miners expect to have to raise cash in the next 12 months, but with such high competition for funds, Grant Thornton has warned that there will continue to be limited capital for early stage explorers.
BRI Ferrier principal Antony Resnick said the capital markets had been “brutal”
“Small and medium companies are facing a perfect storm of financial woes,” he said.
“Coupled with low levels of consumer confidence, falling commodity export prices and stagnating household incomes, it’s no wonder many listed entities are struggling.”
He warned that voluntary administrations were set to soar, with the Australian Securities and Investments commission recording a 28% rise in voluntary administrations in the June quarter.
“We expect this upward trend to continue as more directors opt for a VA as a final resort attempt to salvage the business when the realisation dawns that the company no longer has the means to continue trading,” Resnick said.
By MiningNews.net’s count, 10 ASX-listed miners (or their subsidiaries) have already collapsed this year – the most recent being coal developer Bandanna Energy last week – already well up on the total of seven collapses last year.
But Resnick said more companies were proactively using voluntary administration as a tool to save the business.
“If initiated early enough and the directors have a considered plan for restructuring the business, VAs can be a valuable lifeline, giving distressed companies the maximum chance of survival,” he said.
Mirabela Nickel, which collapsed earlier this year, is an example of a company which quickly bounced back from administration.
“Administrators can implement many options that are not readily available to the directors, including capitalising debt using a deed of company arrangement or restructuring for the purposes of a backdoor listing,” Resnick said.
M+K Lawyers principal Gavin Robertson said voluntary administration gave a company “breathing space” to restructure and preserve assets.
“And where assets sales are part of the solution the administrator will in most cases be able to achieve a better result than the directors because of their strong commercial reputation and ability to inject competitive tension into any bidding process,” he said.
“Additionally, shareholder and director approval are not required to carry out the sale which can save significant time and money.”
Robertson said another benefit was that directors were protected from personal liability.
He warned companies to act early to give them the best chance of recovery.
“Putting a company into administration is a finely balanced decision but at the end of the day, erring on the side of being proactive can allow the directors to preserve a measure of control over the company’s destiny and enhance their chances of saving it through a reconstruction that can mean the difference between liquidation and a new lease on life,” he said.