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WHAT NEXT FOR THE NEW ZEALAND RESTRUCTURING AND INSOLVENCY INDUSTRY?
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So far, 2016 has seen a continuation of last year’s generally quiet insolvency market. In this update, we look at what will shape the market over the next year.

The current picture

The New Zealand economy remains buoyant. GDP growth for the year to 30 June was 3.6% and the country is experiencing what the NBR has called a “historic trifecta” of low interest rates, stifled inflation and a current account deficit for the year ended June 2016 that has decreased to 2.9% of GDP. These factors have led Liam Dann at The Herald to suggest that the so-called “rock star economy” is on the comeback trail.

So what does this mean for lenders and insolvency practitioners? Unless the economy experiences an unanticipated external shock, most borrowers and businesses should be able to avoid distress or take steps to avoid formal insolvency processes, assisted by relatively easy access to capital and the aforementioned low interest rates. A marked increase in restructuring and insolvency activity in New Zealand is unlikely.

The New Zealand market stands in contrast with the more active international restructuring and insolvency scene. As the outlook for the global economy has become more uncertain, commentators are pointing to the energy, metals and mining, commodity, shipping and retail sectors as areas which are feeling the pressure and will keep restructuring and insolvency practitioners busy.

So, what can we expect to see during the next year?

  • We anticipate that the number of formal insolvency appointments will continue to fall or at least remain static. The number of receiverships, liquidations and administrations in 2016 is down on previous years. The number of liquidations reached a peak in 2009 during the GFC and have fallen each year since. Receiverships peaked in 2010 and have also fallen in number, while there remain only a handful of administrations each year. 
  • Lenders will continue to support workouts and informal debt restructurings that avoid the cost and publicity of formal insolvency appointments.
  • We would expect the Government to embrace most of the recommendations made by the Insolvency Working Group in its first report. These recommendations relate to the regulation of insolvency practitioners through a licensing system and also new restrictions on steps that a company can take once it has been served with a liquidation application. These reforms are overdue and will bolster public confidence in the insolvency industry. The IWG’s second report, which will address voidable transactions and other potential areas of reform, is due later in the year and will be of much interest.
  • A new reality for dairy farmers. The recent increases in milk solid prices will bring cheer to the dairy sector and the lenders that support farmers and farm industry service providers. However, most commentators expect that volatility will remain a key feature of the dairy market. Cost reduction measures taken by farmers may need to be embedded if high dairy debt levels are to reduce.

Despite the rally in dairy prices, they are still below the generally accepted break-even point for farmers. This is likely to mean that there will be some agricultural borrowers who will, unfortunately, continue to struggle. Borrowers with poorly-managed farms, or who have neglected essential compliance (such as environmental regulation and health and safety), are more likely to lose the confidence of their lenders and be exposed to financial difficulty. While most lenders have generally been supportive of their borrowers so far, our pick is that some banks will have no choice but to take formal steps against their most distressed borrowers in the first quarter of 2017.

  • Further distress in the building industry. Even though the building sector is currently experiencing a boom, expansion can bring with it its own difficulties, including overtrading. This year alone, it has been reported that liquidators have been appointed to more than 60 Christchurch construction-related companies. Last week it was announced that the liquidators of the Stonewood Homes companies have secured $1million in funding to investigate why these companies collapsed. 
  • A challenging environment for some traditional retailers. The year started with the receivership and administration of well-known electronics retailer Dick Smith and was followed by the administration (and subsequent liquidation) of retailers Valleygirl (which was also in receivership) and Nicholas Jermyn. We expect that there will continue to be pressure on some “bricks and mortar” retailers, particularly apparel merchandisers, unless they have a strong brand and active online presence.
  • The Court of Appeal will have the opportunity to examine the voluntary administration (VA) regime. In early August the High Court rejected Cargill International SA’s challenge to Solid Energy’s Deed of Comp any Arrangement (DoCA). The High Court’s decision addresses many aspects of VA and DoCA procedure, including the scope of the deed administrator’s role, the powers of a creditors’ committee, the release of third parties and the different treatment of creditors under a DoCA. Cargill has appealed the High Court’s ruling and the Court of Appeal’s decision will be eagerly awaited by banks and insolvency practitioners.
  • With several litigation funders operating in the New Zealand market, we would expect to see more insolvency practitioners exploring the possibility of funded claims against directors and professionals in the wake of corporate failure.

The current picture

The New Zealand economy remains buoyant. GDP growth for the year to 30 June was 3.6% and the country is experiencing what the NBR has called a “historic trifecta” of low interest rates, stifled inflation and a current account deficit for the year ended June 2016 that has decreased to 2.9% of GDP. These factors have led Liam Dann at The Herald to suggest that the so-called “rock star economy” is on the comeback trail.

So what does this mean for lenders and insolvency practitioners? Unless the economy experiences an unanticipated external shock, most borrowers and businesses should be able to avoid distress or take steps to avoid formal insolvency processes, assisted by relatively easy access to capital and the aforementioned low interest rates. A marked increase in restructuring and insolvency activity in New Zealand is unlikely.

The New Zealand market stands in contrast with the more active international restructuring and insolvency scene. As the outlook for the global economy has become more uncertain, commentators are pointing to the energy, metals and mining, commodity, shipping and retail sectors as areas which are feeling the pressure and will keep restructuring and insolvency practitioners busy.
 

So, what can we expect to see during the next year?

    • We anticipate that the number of formal insolvency appointments will continue to fall or at least remain static. The number of receiverships, liquidations and administrations in 2016 is down on previous years. The number of liquidations reached a peak in 2009 during the GFC and have fallen each year since. Receiverships peaked in 2010 and have also fallen in number, while there remain only a handful of administrations each year. 

 

    • Lenders will continue to support workouts and informal debt restructurings that avoid the cost and publicity of formal insolvency appointments.

 

    • We would expect the Government to embrace most of the recommendations made by the Insolvency Working Group in its first report. These recommendations relate to the regulation of insolvency practitioners through a licensing system and also new restrictions on steps that a company can take once it has been served with a liquidation application. These reforms are overdue and will bolster public confidence in the insolvency industry. The IWG’s second report, which will address voidable transactions and other potential areas of reform, is due later in the year and will be of much interest.

 

    • A new reality for dairy farmers. The recent increases in milk solid prices will bring cheer to the dairy sector and the lenders that support farmers and farm industry service providers. However, most commentators expect that volatility will remain a key feature of the dairy market. Cost reduction measures taken by farmers may need to be embedded if high dairy debt levels are to reduce.

      Despite the rally in dairy prices, they are still below the generally accepted break-even point for farmers. This is likely to mean that there will be some agricultural borrowers who will, unfortunately, continue to struggle. Borrowers with poorly-managed farms, or who have neglected essential compliance (such as environmental regulation and health and safety), are more likely to lose the confidence of their lenders and be exposed to financial difficulty. While most lenders have generally been supportive of their borrowers so far, our pick is that some banks will have no choice but to take formal steps against their most distressed borrowers in the first quarter of 2017.

 

    • Further distress in the building industry. Even though the building sector is currently experiencing a boom, expansion can bring with it its own difficulties, including overtrading. This year alone, it has been reported that liquidators have been appointed to more than 60 Christchurch construction-related companies. Last week it was announced that the liquidators of the Stonewood Homes companies have secured $1million in funding to investigate why these companies collapsed. 

 

    • A challenging environment for some traditional retailers. The year started with the receivership and administration of well-known electronics retailer Dick Smith and was followed by the administration (and subsequent liquidation) of retailers Valleygirl (which was also in receivership) and Nicholas Jermyn. We expect that there will continue to be pressure on some “bricks and mortar” retailers, particularly apparel merchandisers, unless they have a strong brand and active online presence.

 

    • The Court of Appeal will have the opportunity to examine the voluntary administration (VA) regime. In early August the High Court rejected Cargill International SA’s challenge to Solid Energy’s Deed of Comp any Arrangement (DoCA). The High Court’s decision addresses many aspects of VA and DoCA procedure, including the scope of the deed administrator’s role, the powers of a creditors’ committee, the release of third parties and the different treatment of creditors under a DoCA. Cargill has appealed the High Court’s ruling and the Court of Appeal’s decision will be eagerly awaited by banks and insolvency practitioners.

 

  • With several litigation funders operating in the New Zealand market, we would expect to see more insolvency practitioners exploring the possibility of funded claims against directors and professionals in the wake of corporate failure.

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