THE BUSINESS STRESS REPORT 2011 Worst Year on record for Corporate Insolvencies

Research By: Dissolve Spokesperson: Cliff Sanderson 1.0 OVERVIEW

The Dissolve Business Stress Report is a quarterly analysis of business failures in corporate Australia. The Report measures the number of company insolvencies, the cost of insolvencies to Australian Banks and provides a state-by-state analysis. Key Factual Findings 2011 was the worst year on record for corporate insolvencies. ASIC recently released statistics for insolvencies for November 2011 and they reveal that the 11 months to November 2011 is already higher than the previous highest 12 months results for a calendar year. The 11 months to November recorded 9,718 corporate insolvencies which already exceeds the previous high of 9,601 being for calendar year 2010. Six out of the 11 months for 2011 documented so far have posted the highest ever number of insolvencies for that month. Interestingly, November itself was not a highest ever, which may indicate that insolvency numbers are plateauing. Other key findings of the latest Business Stress Report are as follows: The cost of All Bank New Asset Impairment Charges (or Bad Debts) for Australian Banks in the period from January to September 2011, being the latest results available, is $15.7 billion. That is a decrease from the same period in 2010, which was $18.1 billion, but still well above the average pre-GFC level of $3 billion. An analysis on a state-by-state basis for calendar year 2011 reveals significant problems for Tasmania (up 82% on the average of the previous five years) and Western Australia (up 70%). There is a more moderate increase in insolvencies for Victoria (up 21%), South Australia (up 36%) and Queensland (up 38%). New South Wales is only up 9%. Interestingly, there has not been a significant increase in Queensland insolvency numbers since the floods in January 2011. For the 11 months to November in 2011 there have been 1,895 Queensland insolvencies compared to 1,826 for the same period in 2010, being an increase of only 4%. The percentage of insolvent companies successfully using insolvency legislation to restructure has continued to decline from its high of 14% in 1999 to a new low of 5%.

Our Comments The number of insolvency appointments in 2011 has seen a number of highest evers. The better news is that there are some indicators that the numbers may be plateauing. The cost of Insolvencies (All Bank New Asset Impairment Charges) has been on a slow decline from their peak at $11.4 billion in the June 2009 quarter but the $5 billion figure for the September 2011 quarter could be regarded as only less bad when compared to the pre GFC average of $1.1 billion. Overall, the figures show that there has been a move from a smaller number of large insolvencies immediately post GFC to record numbers of insolvencies in 2011 but of a smaller value.

2.0

INSOLVENCY INDEX

The Insolvency Index measures the number of companies entering some form of insolvency administration such as Liquidation, Voluntary Administration or Receivership. The source data is the Australian Securities and Investment Commission (ASIC) monthly insolvency statistics. The data is released monthly with the latest available data being to November 2011. Prior to 1999 the ASIC data was released in a different and less useful format. The calendar year to November 2011 has been the highest ever, when comparing to the same time period in previous years. From January to November 2011 there was a total of 9,718 insolvency appointments; this is a 22% increase over the average of the same time period over the last 5 years and a 10% increase over the same time period in 2010. 2010 was the previous highest ever. The number of companies entering some form of insolvency administration in the rolling 12 months ended November 2011 was 10,502. That is an increase of 22% on the average of the previous 5 years and an increase of 10% over the immediately prior year (see Graph 1). The number of companies entering some form of insolvency administration in the month of November 2011 was 983. That was a 17% increase over the prior year November but off the peak of 1,095 in March 2009. Included in the total number of insolvencies is the number of appointments by secured creditors, which will include Receiverships where a secured creditor appoints an external party, and Controllerships, where a secured creditor takes control of an asset itself. In the 2011 calendar year there have been 1,286 appointments by Secured Creditors, this is the highest ever figure for this time period. It is an increase of 55% over an average of the same time period over the previous 5 years. There were 1,386 appointments by Secured Creditors in the rolling 12 months to November 2011 which is an increase of 56% over the average of the previous five years (see Graph 2).

Graph 1 - Company Insolvencies per Year

12,000 10,000 8,000 6,000 4,000 2,000 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Rolling Year to each November

Graph 2 - Insolvency Appointments by Secured Creditors per Year

1,400 1,200 1,000 800 600 400 200 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Rolling year to each November

3.0

BANK ASSET IMPAIRMENT INDEX

The best way to obtain an understanding of the cost of insolvencies is to examine the level of new Impaired Assets declared by Australian Banks. That figure will exclude all non-Bank bad debts but still provides a useful indicator of the cost of insolvencies. The information is released quarterly by the Reserve Bank and the data recently released is for the period ended September 2011. The cost of All Bank New Asset Impairment Charges (or Bad Debts) for Australian Banks for calendar year 2011 (January to September) is $15.7 billion. That is a decrease from the same period in 2010, which was $18.1 billion, but still well above the average pre-GFC level of $3 billion. The annual cost of All Bank New Asset Impairment Charges, which equates to bad debts, by Australian Banks for the year to September 2011 has dropped to $21.3 billion from a high of $36.1 billion. That compares to an average of around $4.4 billion per year for the years 1995 to 2007.

Graph 4 - All Bank New Impairment Charges by Year

40,000 35,000 30,000 $ million 25,000 20,000 15,000 10,000 5,000 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Rolling year to each September

On a quarterly basis Impairment Charges are on a slow decline from their peak at $11.4 billion in the June 2009 quarter. However the $5 billion figure for the quarter to September 2011 can be regarded as only less bad when compared to the pre GFC average of $1.1 billion.

Graph 5 - Bank Impaired Assets by Quarter

12000 10000 $ million 8000 6000 4000 2000 0 Mar-1994 Sep-1994 Mar-1995 Sep-1995 Mar-1996 Sep-1996 Mar-1997 Sep-1997 Mar-1998 Sep-1998 Mar-1999 Sep-1999 Mar-2000 Sep-2000 Mar-2001 Sep-2001 Mar-2002 Sep-2002 Mar-2003 Sep-2003 Mar-2004 Sep-2004 Mar-2005 Sep-2005 Mar-2006 Sep-2006 Mar-2007 Sep-2007 Mar-2008 Sep-2008 Mar-2009 Sep-2009 Mar-2010 Sep-2010 Mar-2011 Sep-2011 4.0 RESTRUCTURING RATIO Having established indicators of the number and cost of companies in financial distress, the next question is what proportion of companies in financial difficulty successfully restructure. There is no way of measuring the number of companies that successfully restructure using informal restructuring methods such as Informal Workouts or Debt Moratoriums as those negotiations are conducted in secret and not reported. We have therefore developed a reliable measure of the ratio of successful corporate restructurings by comparing the number of companies that successfully execute a Deed of Company Arrangement against the number of companies that enter some form of insolvency administration. A Deed of Company Arrangement, or DOCA, is essentially a deal agreed by a company with its creditors as part of the Voluntary Administration procedure. We found that only 5% of companies entering some sort of insolvency administration successfully executed a DOCA in the 12 months to November 2011. There has been a decline from 14.2% in 1999 to the current level (see Graph 5). This reveals a very low success rate in restructuring Australian companies that strike financial difficulties with only 1 in 20 companies entering a formal insolvency administration finding their way through the insolvency legislation and creditor negotiations to agree a restructuring. Clearly, many companies cannot be saved and liquidation is the appropriate outcome. So it is worth examining the restructuring success rate of companies that enter Voluntary Administration. The legislation states that the purpose of the Voluntary Administration legislation is to maximise the chances of a company being restructured. That is done by executing a DOCA. In the 12 months to November 2011, the percentage of companies that entered Voluntary Administration and then successfully agreed a DOCA with their creditors was 35.1%. That is an improvement on pre GFC years where it has ranged between 23% and 28% but we regard all of these percentages as well below what should be expected. 4

Graph 5 - DOCAs as a percentage of Total Company Insolvencies

14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Rolling year to each November

Overall, we regard the success rate in restructuring insolvent companies as being very poor. That conclusion applies whether we look at the success rate as being a percentage of total insolvencies or as a percentage of voluntary administrations. 5.0 STATE BY STATE ANALYSIS

Finally we have analysed the ASIC Insolvency appointment data by state and compared that to the average of the previous five years. Below is a graph of the percentage increase in the 11 months of 2011 for each state.

Graph 7 - % Increase in Average Insolvencies Per Month CY2011 Over Average Month of Previous 5 Years
80% 70% 60% 50% 40% 30% 20% 10% 0% NSW VIC QLD SA WA TAS NT ACT National 9% 21% 38% 38% 18% 22% 71% 78% 70%

The statistics show that all states have experienced an increase in insolvency numbers for 2011 but the results vary significantly. The three standouts are WA, Tasmania and NT. The raw numbers for Tasmania and NT are small and so the percentage increase must be treated with some caution. Interestingly, there has not been a significant increase in Queensland insolvency numbers since the floods in January 2011. For the 11 months to November in 2011 there have been 1,826 Queensland insolvencies compared to 1,895 for the same period in 2010, being an increase of only 4%. Notably, Queensland insolvencies comprise 22% of the national total in the month of November 2011 whilst they have been averaging 18% over the past 5 years. So the insolvency numbers for Queensland are up on previous years but the numbers are not as bad as expected.

Graph 8 - Company Insolvencies per year in QLD

2500 2000 1500 1000 500 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Rolling year to each November

ABOUT DISSOLVE
Dissolve specialises in low cost company liquidations. Dissolve initially provides online and telephone advice to directors of companies in financial distress. The Dissolve website www.dissolve.com.au provides some unique tools to assist directors of companies in financial distress including: Information. A raft of information and tools to assist Directors of companies in financial distress Is my company insolvent? A simple tick box page that simplifies the extremely complicated question of whether or not a company is insolvent. Ask IRA! An online tool that asks directors four questions and, depending on the answers given, provides directors with an assessment of where their company sits in the Restructuring Spectrum and what solutions are available to a company in that position. Dissolve can be contacted by phone on (02) 9290 2220 or directors can request a call-back by filling out the forms at www.dissolve.com.au.