Value of bank impairment charges reach a record high


The number and value of corporate insolvencies have hit startling new highs, according to new analysis

Value of bank impairment charges reach a record high
Value of bank impairment charges reach a record high

The number and value of corporate insolvencies have hit startling new highs, according to new analysis.

The second quarterly Business Stress Report from Restructuring Works, a business specialising in corporate restructuring, reveals:

The value of ‘all bank new asset impairment charges’ has increased to $20.7 billion in calendar year 2008. That is a more than four-fold increase on 2007 which was $4.4 billion. The last quarter of 2008 saw banks make new asset impairment charges of $7.8 billion, which is the highest quarter recorded since the Reserve Bank started collected this data in 1994.

The number of companies entering some form of insolvency administration in the year ended February 2009 was 9,348, which is an increase of 30 percent on the average of the previous five years and 23 percent more than the immediately prior year. February 2009 was the worst February recorded since 1999 when ASIC started releasing data in the current format.

The number of appointments by secured creditors, most commonly receiverships, was 1,043 appointments in the year to February 2009, which is up 140 percent on the average of the previous five years.

The percentage of companies successfully restructuring remains very low. Only 6.4 percent of companies entering some sort of insolvency administration successfully restructured in the year to February 2009. This compares with a high of 14 percent in 1999.

Restructuring Works Director Cliff Sanderson says: "The standout number is the value of new impairment charges in Australian banks; or viewed another way, their problem loans.

"In 2008 those charges exceeded $20 billion. Since 1995 the yearly impairment charges in Australian banks commonly ran between $3 and $4 billion. So 2008 saw a dramatic increase in bad assets in Australian banks."

Sanderson says the other standout number is the number of insolvency appointments by secured creditors, most commonly banks, which have risen a dramatic 140 percent on the average of the previous five years.

"Over the past nine years the number has usually been around the 400 to 500 mark but in the year to February 2009 it has reached 1,043," he says.

The insolvency statistic most commonly quoted is the number of companies entering some form of insolvency. Sanderson says: "The number of companies entering some form of insolvency administration is concerning, being up 30 percent on the average of the previous five years, but it is not outrageously bad in itself. This supports anecdotal evidence from insolvency practitioners and industry participants that there were a limited number of very large insolvencies in the last year but the total number of insolvencies is yet to take off."

Sanderson notes there is a very low success rate in restructuring Australian companies that strike financial difficulties, with only one in 15 companies entering a formal insolvency administration able to agree a restructuring with their creditors.

"This again demonstrates that Australia’s restructuring laws are not effective in facilitating corporate restructurings," he says.

The full Business Stress Report can be downloaded from www.restructuringworks.com.au.

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