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Distressed Debt and Special Situations 

by Ron Forster

Published: October, 2020

Submission: November, 2020

 



Facing Australia's first recession in 30 years, Australian businesses are attempting to steer a course not only for survival but for the growth needed to be a viable long term. But alongside uncertainty comes opportunity. Our new report, prepared in partnership with Acuris, explores the key steps for companies and investors to take advantage of the opportunities – and decisive, informed and proactive action is critical.


As the economic impact of COVID-19 continues to affect Australian businesses across all industries, a range of temporary government measures may be delaying inevitable restructurings and insolvencies.


Distressed companies need to act now


Through temporary incentives and regulatory changes, distressed companies have been granted additional time to set themselves up to be an attractive prospect for capital investment.


It's important that the time is used wisely, with careful consideration given to potential restructuring measures well before lending covenant breaches occur or repayments can't be met.


Debt funds will offer a much-needed source of capital


While Australia’s big four banks have provided unprecedented support to most borrowers, they will not be able to support the market on their own. This is where non bank lenders and other alternative capital providers will play an important role.


 


“In order to receive funding, companies will need
to demonstrate that they have a viable business plan
going forward, and that future growth looks
realistic and promising. Businesses may need to be
recalibrated to achieve that.”  


 


How to prepare for the future


There are critical actions that companies and funds can take now that will prepare them for opportunities and challenges that the future may bring – even if the precise nature of them is unknown.


  • Review, reorganise and recalibrate. In order to receive capital funding or investment, companies need to demonstrate that they have a viable business plan going forward. Restructuring and refinancing decisions need to be made now to ensure companies' ongoing viability and resilience.

  • Recognise the different pathways across industries. Different Australian industries offer a diverse cross section of opportunities and challenges, with recovery and permanent change expected on different timeframes. Detailed industry knowledge, including government regulation and incentives, will help funds and investors understand how to maximise their chances of success.

  • Understand Australia's changing regulatory framework. COVID-19 has brought with it new complications such as Foreign Investment Review Board criteria changes and additional tax considerations. ASX and Corporations Act rules, for example, are critical factors in shaping how to inject capital into distressed companies. An early understanding of how to operate within this framework is key to ensuring a successful outcome.

Tourism and leisure


While the tourism and leisure industry has been hit particularly hard, the sector is attractive for the long term and will be held in high regard by investors and debt funds. Domestic tourism will pick up as state borders reopen and over the next few years, foreign tourists will eventually return.


Energy & resources


Uncertainty and lower energy demand, challenging oil and coal prices and the increasing focus on decarbonisation offers potential for distressed assets, consolidation and restructures – particularly for oil and gas and coal companies.


Education


Financial distress is creating short-term opportunities in higher education, specifically among private providers of education who cater to overseas students.


Real Estate


There has been an influx of capital partnering in all property sectors (including traditional financiers transitioning into equity providers) to diversify a landowner/developer’s risk.


Infrastructure


State governments plan to fast track infrastructure projects as a means of stimulating the COVID-19 economy. A depressed local contracting market may offer opportunities for tier 1 contractors or other local participants to purchase struggling sub-contractors and services businesses.


Financial services


Banks have ramped up their expected credit loss provisions in anticipation of greater distressed companies as stimulus packages expire. Smaller ADIs, credit unions and mutuals may come under pressure due to current economic conditions, which may result in consolidations.


 


Download Report


 



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