KordaMentha – TMA Australia Turnaround Survey

December 2020 Australia KordaMentha – TMA Australia Turnaround Survey

Introduction

The annual KordaMentha As Australia and the rest of the world continue to navigate the health and economic impacts of the Profile of respondents COVID-19 pandemic, the outlook beyond 2020 remains – TMA Survey provides Other uncertain. an insight into the current Equity holder/ KordaMentha, in conjunction with the Turnaround Distressed investor/ Lender Private equity investor Management Association of Australia, surveyed the economic and business 4% Australian turnaround community for their insights on Corporate 6% 11% Lawyer advisor the response to COVID-19 and the outlook over the next 9% environment in Australia, and 11% 12 months. This survey follows our May 2020 survey, 157 the outlook beyond 2020. which focused on the impact of COVID-19. respondents These summary results cover the following topics: 21% 38% Turnaround Insolvency service provider • Australia’s turnaround environment. professional • The Government and legislative response to the economic impact of COVID-19 in Australia. South Australia/Tasmania/ • The outlook for Australian businesses as they Northern Territory/ACT position for recovery. Western Australia 1% • The ‘new normal’, beyond COVID-19. 5% Queensland 15% National

41%

21% Victoria

17%

New South Wales

Note: not all respondents answered all survey questions. The results presented in this report are the percentage of respondents who answered the question, not total survey respondents.

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Key insights

01 02 03 04 05 Despite recent press Respondents agree Most respondents 77% of respondents Looking over the horizon that Australia’s that there has been believe that Australia’s expect hedge funds/ to the ‘new normal’ recession is over, sufficient support current turnaround and private equity/special beyond COVID-19, respondents believe and intervention from insolvency legislative situations funds to 81% of respondents that Australia was governments. However regime (including be more active over expect Australia-China not yet half-way most respondents the upcoming Small the next 12 months. relations to have a through. Only 17% of believe the cessation Business Restructuring This suggests a pivot significant impact on respondents expect a of the insolvent trading changes) is sufficient from the spike in Australian businesses V-shaped economic moratorium and wind to deal with COVID-19’s equity raising activity and the economy. recovery, more than the back of JobKeeper will economic impacts. seen earlier in 2020 10% in the May survey, result in a significant to a more distressed- but still very low. increase in corporate focused investment insolvencies. environment.

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Turnaround environment: now and then

Finding Measure May 2020 November 2020

U-shaped recovery % % Shape of Poor outlook remains, but 58 42 recovery increased recovery speed V-shaped recovery 10% 17%

Hedge funds to be more active % % Funding for Alternative financiers expected 55 77 turnarounds to be more active New lenders to be more active 22% 53% Tourism significantly negative outlook 95% 43% Sentiment has improved for Industry some key industries, however Hospitality significantly negative outlook 95% 33% outlook remains negative Retail and consumer services significantly negative outlook 89% 23% Working and Some pandemic-driven changes Video conferencing and working from home to be retained 93% 97% consumption to working and consumption look behaviours like staying Home entertainment and shopping trends to be retained 50% 66%

The pace of change since early 2020 has been unprecedented, with businesses and organisations adapting rapidly to COVID-19 and its related restrictions. The past six months have enabled survey respondents to form more comprehensive views on Australia’s economic and business outlook, and this has been reflected in some key changes from the survey conducted in May 2020. The next six to 12 months may provide greater clarity, however given the pace and scale of change in the last six months there are no guarantees.

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Turnaround environment: current

Service demand Service mix Change in level of enquiries for respondents’ Types of services provides provided over the services over the past six months past six months

No change Lender negotiation 34% support

Turnaround program 12% 34% implementation

Some increase Liquidity reviews 34%

24% 55% Deterioration Recovery planning 30%

Lease negotiation 20% 9% support

Significant increase Safe Harbour advice 18%

The ‘tsunami’ of turnaround and insolvency activity predicted in the May survey has not A broad range of services have been provided by respondents to clients, and potential yet eventuated, with 55% of respondents experiencing a deterioration in enquiries over clients, over the past six months. Perhaps surprisingly, only 18% of respondents had the past six months. provided Safe Harbour advice over the past six months, which is no doubt a reflection of the moratorium on insolvent trading.

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Government and legislative response

Respondents broadly believe there has been sufficient support and intervention from governments, and expect they will have the Government response desired effect of softening Australia’s economic landing.

Will further government support and stimulus (e.g. additional JobKeeper Respondents’ suggestions for further government support and Respondents’ suggestions for changes to Australia’s current payments) be required? stimulus included: turnaround and insolvency legislative regime included:

Yes • Targeted sector-specific support (e.g. Aged Care). • Increased thresholds under the Debtor in Possession model. No • Infrastructure investment. • Greater clarity regarding advisors’ liabilities and qualifications, and transition arrangements. • Tax reform. 40% • Extend the Small Business Restructuring scheme to include • Extension of JobKeeper. 60% larger businesses. • Allow pre-pack insolvencies and extension of Safe Harbour provisions.

Legislative response

Is Australia’s current turnaround and insolvency How effective will the recently announced SME What effect will the extension of the insolvent To what extent will the cessation of the regime sufficient to deal with COVID-19 insolvency reform measures be? trading moratorium to 31 December 2020 have on insolvent trading moratorium increase economic impacts? Australia’s economic recovery? corporate insolvencies in 2021?

3% 11% 24%

37% 44% 45% 56%

76% 60% 44%

Yes Ineffective Positive Significant No Somewhat effective Negative Moderately Highly effective No impact

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Positioning for recovery

Recovery profile Geographic and industry outlook

Expected shape of Australia’s economic recovery Outlook for each state over the next 12 months Victoria V Queensland Tasmania South Australia 17% Western Australia U Northern Territory 42% New South Wales Australian Capital Territory 0% 20% 40% 60% 80% 100% Very Somewhat Neutral Positive Very 41% negative negative positive

W Outlook for each Australian industry over the next 12 months Tourism Hospitality Retail and consumer services Commercial real estate Progression through the recession Education Construction Media and telecommunications 1 Just starting 4 Clearly exiting 10 Transport and logistics Energy and utilities Manufacturing Agriculture/food As was the case in the previous survey, it is clear that respondents do not expect Mining and resources the Australian economy to bounce back rapidly. Professional services The outlook for individual industries is similar to the previous survey, with Tourism, Health and related services Hospitality, Commercial Real Estate and Education all having poor outlooks. 0% 20% 40% 60% 80% 100% Significantly Moderately Neutral Positive negative outlook negative outlook outlook outlook

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Positioning for recovery

Recovery actions Early 2020 saw a significant uplift in equity finance raisings as large ASX-listed Level of activity of external financing for turnarounds over next 12 months corporates reinforced balance sheets for the uncertainty ahead. Whilst this source of financing is expected to remain strong, respondents also noted New debt from existing lenders a continued expectation of a positive outlook for ‘Hedge funds/private equity/special situations funds’ as a source of external financing. Equity Injections

Full debt re-financing/ recapitalisation from new lenders Other suggested steps to best position for recovery Mezzanine or subordinated debt Create a turnaround plan and communicate that plan Hedge funds/private equity/ special situations funds Undertake a strategy and efficiency review 0% 20% 40% 60% 80% 100%

Worse Same Better Maximise use of IT

Importance of initiatives for businesses as they position for recovery Somewhat Very Review risk strategies and continuity plan important important Plan early, make hard decisions and act now Cost reduction – overheads

Change management and operational transformation Consider digital and government-impacted aspects of every component of Cost reduction – direct costs the business Inventory management Divestment or closure of business unit Review asset base for cash creation opportunities Cultural and governance change Bolster liquidity buffers in preparation for reduction in government support Revenue growth – existing products and/or markets Revenue growth – new products and/or markets Focus on opportunities for expansion and acquisition

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Positioning for recovery

Insolvency triggers Demand for services Advisor attributes

Trigger for increase in formal insolvency Expected interest levels Importance of advisor attributes as appointments over the next 12 months clients position for recovery

Decision and action Informal 83% End of JobKeeper 41% turnaround oriented advice Expiration of Director Experience in similar moratorium for 34% distressed situations 67% insolvent trading Formal insolvency Experience working Lenders tightening advice 58% support criteria 11% with financiers 0% 20% 40% 60% 80% 100% Ability to gain Other 8% operational control of 49% an orgnaisation

Do not think there will Industry or technical 5% 45% be an increase High Medium Low expertise

Cost 36%

The range of ongoing support measures provided by the The most important attribute clients will look for is being Previous client/ government appear to have had the intended effect of decision and action oriented. Coupled with experience advisor relationship 20% cushioning Australian businesses. in similar distressed situations, clients will be looking for calm heads to help take control and steer through the However, as government support is reduced and recovery process. Australia’s economic situation normalises, it is expected that there will be an increase in demand for both formal insolvency and informal turnaround services.

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Beyond COVID-19

Industries with permanently different business Changes implemented during COVID-19 that What will businesses do differently to better prepare for models following COVID-19 will be retained post-crisis future ‘black swan’ events

Increased utilisation of working Better planning, including business Retail and consumer services 95% 97% from home and video conferencing continuity planning and crisis preparation and Hospitality 73% management Decreased demand for Tourism 68% 76% office space Education 65% Sustained consumer preference Maintain lower operating leverage Health and related services 53% for home entertainment, 66% Professional services 52% shopping, health and fitness etc. Commercial real estate 39% Greater reliance on diversified 65% Media and telecommunications 27% and domestic supply chains Focus on culture

Transport and logistics 27% Focus on domestic, rather than 55% Manufacturing 22% overseas, tourism Agriculture/food 8% Increased/adjusted risk 35% Energy and utilities 6% assessment processes Impact of non-pandemic issues Construction 6% Mining and resources 6% Other 2% Australia-China relations

Low wage growth As Australia emerges from the health-related impacts of However, many of the tools and techniques that will COVID-19, the economic impacts remain unclear. enable businesses to deal with this ‘new normal’ already US election exist. Beyond COVID-19, the best positioned businesses As government support unwinds, many of the financial Declining residential will be the best prepared businesses, who can adapt and impacts will crystalise and the outlook across industries property market proactively manage continued uncertainty. and states will become clearer. What is clear is that 0% 20% 40% 60% 80% 100% regardless of the economy-wide headwinds and Significant Moderate No impact tailwinds, individual businesses and organisations will continue to face uniquely challenging circumstances well into 2021 as the ‘new normal’ becomes apparent.

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For specific questions or feedback in relation to the survey, please contact Chris Martin or Sam Bishop. Contacts

Melbourne Sydney Brisbane Rialto South Tower Chifley Tower Level 14 Level 31, 525 Collins Street Level 5, 2 Chifley Square 12 Creek Street Melbourne VIC 3000 Sydney NSW 2000 Brisbane QLD 4000 Tel: +61 3 8623 3333 Tel: +61 2 8257 3000 Tel: +61 7 3338 0222 Chris Martin Sam Bishop [email protected] [email protected] [email protected] Partner | Melbourne Director | Melbourne [email protected] [email protected] +61 3 8623 3425 +61 3 8623 3465 Townsville Gold Coast Perth Level 6 S225 Oracle South Level 10 75 Denham Street Level 2, 17 Elizabeth Avenue 40 St Georges Terrace Townsville QLD 4810 Broadbeach QLD 4218 Perth WA 6000 Tel: +61 7 4724 9888 Tel: +61 7 3338 0230 Tel: +61 8 9220 9333 [email protected] [email protected] [email protected]

Suzanne Wauchope Henriette Rothschild Neil Hayward Partner | Brisbane Partner | Melbourne Partner | Sydney Singapore Jakarta [email protected] [email protected] [email protected] 16 Collyer Quay Level 18 +61 7 3338 0278 +61 3 9908 8949 +61 2 8934 3124 #30-01 World Trade Centre II Singapore 049318 Jalan Jend. We are an advisory and investment firm that helps clients to grow, protect Tel: +65 6593 9333 Sudirman Kav 29-31 and recover value. Jakarta 12920 Indonesia [email protected] We have a team of almost 400 specialists across Asia-Pacific with diverse Tel: +62 21 3972 7000 backgrounds – in finance and real estate through to agriculture, law [email protected] enforcement and the c-suite. Specialists who work together to solve the complex challenges facing corporations, financiers, lawyers, private investors and government. Since 2002, our experts in forensics, real estate, consulting and restructuring This publication, and the information contained therein, is prepared by KordaMentha Partners and staff. It is of a general nature and is not intended to address the circumstances of any particular individual or entity. It does not have been entrusted with the region’s most sensitive commercial matters. constitute advice, legal or otherwise, and should not be relied on as such. Professional advice should be sought On each occasion, they have responded with a bold, impactful solution that prior to actions being taken on any of the information. The authors note that much of the material presented was delivered the best possible result for all stakeholders. originally prepared by others and this publication provides a summary of that material and the personal opinions of the authors. kordamentha.com Limited liability under a scheme approved under Professional Standards Legislation.

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