Insolvencies Spike as Construction Companies Pile on Debt

Voluntary administrations across the country rose sharply in November with the construction sector currently the highest payment arrears by industry, according to credit reporting agency CreditorWatch.

The agency’s business risk index for November also revealed business activity around Australia was currently weaker than expected, indicating the return to pre-Covid levels was likely to take longer than anticipated.

Defaults, external administrations, payment arrears and court actions jumped from October to November as small- and medium-sized businesses struggled to cope with the withdrawal of government led stimulus measures and supply chain issues.

As part of its latest index, which ranks regions and sectors by relative insolvency risk using data from the Australian Securities and Investments Commission, defaults were found to be up by 53 per cent, court actions up by 85 per cent and external administrations up 15 per cent, month-on-month.

The construction sector, where 25 per cent of all insolvencies nationally occur, has recently been weighed down by a number of high-profile collapses.

Last month, Privium and other companies in the group were placed in voluntary administration with debts of more than $28 million. The firm operates in Queensland, NSW and Victoria.

Named the 11th largest builder in Queensland by the HIA this year after completing more than 600 projects worth $180 million, the firm is blaming surging construction costs.

Melbourne’s ABD Group also went into liquidation. Creditors appointed SV Partners’ Michael Carrafa and Peter Gountzos as liquidators of the troubled company.

The collapse leaves between $50 million and $80 million in outstanding debt, sources said.

CreditorWatch chief economist Harley Dale said the construction sector, which has been hit hard by mandatory industry shutdowns, remained on edge.

“Now the industry faces severe supply constraints for items such as timber,” Dale said.

“It is also a challenging industry in terms of gearing back up swiftly.

“This all shows up in a payment arrears figure of 12.4 per cent for November, a number that is unlikely to materially change in approaching months.”

More broadly, business turnover continued to decline from October to November.

On an annual basis business, turnover dropped by 42 per cent in November, the 22nd consecutive drop and the sharpest during of the period.

Credit enquiries, however, rose 17 per cent, indicating that business confidence is slowly improving.

“The increase in credit enquiries in November is an encouraging forward indicator of business confidence, however, there’s a long way to go before business activity is at pre-Covid levels,” CreditorWatch chief executive Patrick Coghlan said.

“Worryingly, trade receivables continued to decline last month, and we also saw significant increases in defaults and administrations.

“Businesses in the Sydney and Melbourne CBDs in particular are at historically high probabilities of default.”

Brisbane and Perth have been the nation’s best performing cities, recording the lowest levels of insolvency risk and some of the strongest credit ratings across the country.

Both cities shared some of the strictest border closure policies during the pandemic, coupled with the least restrictive lockdown policies due to lower local case numbers.

In relative terms, Perth city has been the biggest mover up the CreditorWatch ranks among capital city CBDs during the past 12 months while Brisbane city has seen the largest improvement in insolvency risk and credit ratings.

Brisbane’s hit to its key tourism regions had been offset by a strong performance by the agribusiness sector while Perth had continued to be supported by mining.

Melbourne and Sydney CBDs remain the worst-performing capital city centres with the probability of default at historically high levels due to depressed trade activity that has continued post-lockdown.