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Friday, October 3, 2014 - 12:00
Where will the next hammer fall?

Equating the failure of Ellerines to a heart attack is most apt! It strikes anywhere, anytime and usually without warning – often with fatal consequences. It is very unlikely that even a soothsayer or fortune teller would have foreseen the demise of Ellerines.

Since the global meltdown, a previously unseen element has crept into the business environment – that is, the unexpected and sudden collapse of companies that were ordinarily not on the crystal ball’s dialling list. These failures, with very large commitments to creditors, happen at incredibly short notice generally catching the market unawares.
Roger Munitich, General Manager Sales and Marketing at Credit Guarantee, says, “Safeguarding against those unknown unknowns, to quote that luminary, Donald Rumsfeld, is becoming a business imperative and only a credit insurance policy will ensure that the harsh consequences of such a sudden collapse can be mitigated. For those uninsured suppliers to Ellerines, currently owed many millions, the possibility of an own heart attack is pretty strong.”
The economic landscape has been blindsided by the plethora of large corporate failures over the past year, with the demise of First Tech, Duro Pressings, Alert Steel, Look & Listen (in Business Rescue) and recently Ellerines. These have led to extensive job losses and enormous shortfalls and cash flow problems for suppliers to such entities, with the knock-on effects rippling through the various industries. The scale and pace of some of these failures, let alone the unexpected nature of many, have seen creditors left high and dry with large commitments outstanding. Against the backdrop of an underperforming economy, are businesses not at risk from further unexpected developments that could adversely affect their ability to meet obligations due to their suppliers?
“As can be seen from the graphic below, our overdue advised accounts have been increasing rapidly post the global financial crisis,” says Luke Doig, Senior Economist at Credit Guarantee. “The point to note, however, is that the good year of 2013 yielded the same result as the catastrophic year of 2009. Note, too, that the 2014 level is only for the first eight months of the year and they are in fact some 26.9% ahead of the same period last year.”
A further disconcerting trend is that of average values, impacted as they have been by large company failures mentioned above. This has proven to be a reliable indicator of future payment defaults and hints strongly at more pain on the corporate default front ahead. That is unless a miraculous turnaround can be effected in the local economy.
Doig cautions, “But this is unlikely. Pressures on real demand are unlikely to abate significantly and evidently we may need to look forward to electricity price increases of more than just the 8% plus about 4% to claw back previous costs. Quite simply, the operating environment for business will remain blighted by these factors for the foreseeable future and we would caution very strongly against suppliers not considering payment protection. Another surprise from left field cannot be ruled out.”
He goes on to talk about the economy which, he says, continues to face “headwinds”.
“The 9.8% rise in July 2014 official liquidations to 213 from 194 a year earlier, is beginning to reflect the harsh realities of the current business environment and we would caution that a higher incidence is possible in the months ahead. Indeed, the latest three months to July 2014 is 22.4% higher than that experienced in the same 3-month period of 2013.”
The year-to-date fall in reported closures of 17.1% is likely to be eroded as the economy battles headwinds on many fronts. Our experience shows that payment defaults spiked earlier this year and have since edged lower, though stabilising at elevated levels. The fallout from the strikes is also not fully reflected in the figures and with GDP growth set to underperform spectacularly this year, more liquidations are set to be reported.
“Sectorally, the primary sector experienced exactly the same number of liquidations in July as a year earlier namely 5; the secondary sector saw failures shrink from 26 to 12; and the tertiary sector accounted for 196 bankruptcies versus the 163 seen in July 2013.”
The advent of business rescue in May 2011 has seen some 1,500 cases enter into such proceedings, of which Credit Guarantee has been involved in almost a third.
Minister Davies recently lauded the fact that only 73 of such cases had resulted in liquidation. While we welcome the saving of any business, the issue is: what defines a success? A range of industry sources put success rates at closer to 10-20% at best. And with the skills and number of business rescue practitioners, together with post commence finance remaining challenges, the question is whether creditors have been well served by the process.
“We would also caution against reading too much into the June personal insolvency data of an 8.2% fall in the month from a year earlier or the 4.2% fall in the first half of the year,” says Doig. “Massmart’s trading update last week was a stark indicator of the dire straits of consumer health and while fuel prices are set to fall in September, a rising interest rate environment bodes ill.

Copyright © Insurance Times and Investments® Vol:27.10 1st October, 2014
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