State of Play: Zombie Companies to Face Day of Reckoning

Dominique Grubisa
Dominique Grubisa

Published 6:07 am 29 Jan 2021

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Hi everyone, and welcome to our State of Play. Apologies for the slight delay today, problems with technology, but let’s kick off. I’ve got some really exciting news. You’ll forgive me for being late today when you hear my news. I have got off the phone with our special guests for our live stream Saturday week, and I’m just so excited to be sharing the live stream with him, and you are just going to love what he’s going to talk about. So we had a full debrief on what the content of the live stream is going to be, it’s game changing for you.

So Saturday week we have Gary Vee with us on our live stream, and he’s going to be sharing his philosophies about business where opportunities are right now, and why Australia is the place to be. So really, really exciting live stream, make sure you register for that. In fact, if you’ve already registered for our Robert Kiyosaki live stream this Saturday, you’ll be invited to register for the Gary Vee one. So you’ll get a heads up and a pre-registration opportunity, and I’m going to put the link to register in the description section to this live stream, so you can head over there and register and get a first registration opportunity for the Gary Vee one, and those places will be snapped up quickly.

So exciting times, and what he will be sharing, I think, is going to blow us all away, especially because we’re in the right country at the right time. How we handled coronavirus was, without patting ourselves on the back, but was one of the best responses, and we’re positioned better than any other economy in the world to bounce back, and we’re just the underdog, I think, we’re just the dark horse that people don’t expect, hidden away down under at the bottom of the world, but in touch with Asia, the Asia Pacific region. And now because of coronavirus, business is so much more of a global contemplation than it was ever before. People have embraced technology like never before. My mother in her late seventies is doing Italian classes via Zoom, and if my mum can use Zoom, anyone can do anything.

So it’s an exciting time where anything is possible, and Australians who’ve been somewhat isolated are now connected to the rest of the world, so lots of global opportunities. But at the same time, things are actually going to be quite bad. We’re going to have to tighten our belts, first recession in 30 years, which means that a lot of companies are going to go bust. In fact, the prime minister has even said that, he said there’s going to be casualties of this war. He came out in the press and said, “We can’t save everyone.” So yesterday he said that some businesses will go under, some people will go under. We’ve held back the flood gates because they changed insolvency laws recently, and they gave people six months breathing space. But those six months are going to be up soon, the stimulus packages are going to be up soon, and what the prime minister said is basically, “We can’t keep everyone and every company on life support for forever.”

So zombie companies are what they call companies that are basically dead, brain dead if you like, but are kept alive, and we don’t want that in an economy, it done doesn’t help anyone. So the art of life lies in constant change, readjusting to our surroundings. It’s just that in Australia, we haven’t had that sort of change for like 30 years, we haven’t had a recession. We’ve had peak periods of massive growth, we may have plateaued a little bit and grown at a slower rate, but we’ve never ever gone backwards.

So what it has done, it has leveled the playing field, and what we’re going to see now, once we come off life support, government stimulus packages and reserve bank pumping money into the economy, and that sort of thing, is that we’re going to see some damage in the system, and it’s damage that had to happen. It’s companies that didn’t change, that weren’t efficient, that weren’t effective. Imagine if we had said horses and carts are a great thing 100 years ago, we said, “We have to support horses and carts, we have to keep the industry alive.” It’s not changing with the times, it’s not efficient, it’s not adding value, and it’s not really filling a need for the society for the economy. So it’s just full stutter, it’s clinging on to the past. And what happens when we have a recession, it just cleans everything out, and it gives new, nimble, adaptive, flexible companies, industries, entrepreneurs, a space to fill.

So what normally happens is when we have change, our knee-jerk reaction is to defend the status quo. Just human instinct, caveman instinct, if you like. We are risk averse, and we think, “I’m alive.” So being alive is good, if it ain’t broke, don’t fix it, I’ll just keep things as they are, breathe in, breathe out. And we want to resist any change because whilst we’re alive, there’s hope, and any change may mean death, and we know death is permanent. So what will happen in times of change is that we will defend the status quo.

So sane people, and a lot of sane people going to be really empowered right now while we have a recession, sane people look at the world of reality and they constantly change what’s in their head to conform to external facts. so there’s a recession or, for example, 100 years ago, hang on a minute, there’s these motor vehicles that have been invented, I think those horse and carts are a thing of the past. Or maybe 20, 30 years ago, hang on a minute, these mobile phones, they may be onto something here. I don’t know so much about land lines, this is a new trend of mobile phones.

Sane people can look at what’s happening in the world, adjust their paradigm, and adjust their thinking to fit reality. So they are the people who are going to thrive right now when we have change. If you had lights going off in your head when I said, hey, there is going to be times changing ahead, Australia is in a great position because we can be more global now than ever before. We’re not that country in a whole different time zone at the bottom of the world, we now are a wealthy country with a good stable government. We’re English speaking, we can connect and do business with other people, English speaking countries, the other side of the world, cheaply, easily, effectively. Think bigger, let’s expand our reach.

So if that meant something to you and you can adjust your thinking, the world is currently your oyster. Insane people try to make the world of reality fit what’s in their head, so they defend the status quo. What they’ll do is they’ll say, “No, no, no, you can never ever get rid of horses and carts,” and that is the reality, because that’s their belief. They defend their belief instead of adjusting it to a changing world. And I’m sane, I’m sane as probably most people. Unsane people change the facts to fit their opinions. So what they’ll tend to do is say, “Well, I want to be in this industry now, and no matter what other data is coming at me, or news, or what experts or professionals or people are telling me, my reality is my opinion, and that is that my company is good, my company is going to be fine.”

Definition of insanity, as Albert Einstein said, is “To do the same thing over and over again and expect a different result.” So for those who can see that there’s change, that there’s opportunity, and that we are able to think beyond the current status quo, in the new normal, we’ve got a blank canvas and a level playing field, where big companies have failed, and there’s gaps in the market, we are the ones, the dark horses, who will be able to romp home and bring it home across the finishing line.

How do we look at a zombie company then? A zombie company is one that’s basically on life support. They’ve been surviving with high debts, lines of credit, with loans, with raising equity. So Virgin, you could argue, is an example of a zombie company. They didn’t have good balance sheets to start off with, their commercial arrangements were such that they were living almost month to month, borrowing more and more trying initiatives, pulling different leavers without results. So in terms of a zombie company, they weren’t able to pay down debt, they weren’t able to get into a comfortable position. And they’re the ones who will feel the pain. So they were just surviving by the skin of their teeth, you have some change and you reduce their earnings, then suddenly they fall off the cliff.

So in the March quarter, there were 1053 fewer insolvencies than that time last year, so 17% fewer insolvencies, that’s a big deal. What we’re seeing then is that people, these zombie companies, have been kept alive on government stimulus packages, on the government changing legislation to allow people six months for liquidations, bankruptcies, that sort of thing, whereas normally it was 21 days. So those companies would have fallen in the first 21 days, but we’ve changed the law to give them fake support, or a lifeline to extend them for a period of time. They’re all going to hit critical mass and a tipping point shortly, and that’s where there’ll be opportunities in distress businesses.

The other thing that’s happened is in the June quarter, we’re not finished it yet, but we were 2000 insolvencies less than last year. So again, we’ve had businesses kept alive on life support that shouldn’t really be there, that aren’t efficient and aren’t going to be good for economic recovery. We’ve also had Josh Frydenberg put in place more than 80 temporary changes to regulations and insolvency laws to help prop up, that’s the life support for these sorts of businesses.

And the treasurer says the government will continue to help businesses and households get back on their feet as the economy recovers, but what he said this week was that insolvency regulations will be reviewed, and that we have to stop the life support. And Scott Morrison said, “Yeah, we can’t save everyone. We’ve done our best, we’re thrown everything at it, but there has to be an end date to this.” People would be irrational to think that the government’s just going to hold the whole country together forever, and that every company will come through this. So we are going to see a lot of businesses hit the wall.

So we can see insolvencies rising further into 2020, so that’s companies going belly up. Now that’s on a global scale, so what you’re seeing there is Western Europe, in North America, the Asia Pacific region. So we’re the light pink. So we’re not as bad as other countries that have kept kept afloat inefficient, ineffective companies that aren’t adding value to the economy.

If we look at the statistics from January to March, so it doesn’t really show much of coronavirus period, but our insolvencies are down 16.5% compared to the year before, and that’s because of all sorts of packages. People who had too much personal debt who couldn’t pay their mortgages, who were defaulting on loans, they’ve been given a get out of jail free card for six months. Banks have forgiven the repayments for a while, they’ve bought some breathing space. But there will be a day of reckoning, unless they managed to get a job or change their circumstances, and they can resume servicing debt, debt has a day of reckoning. You have to pay the pipe up.

If we look at the proportion of voluntary versus non-voluntary insolvencies, bankruptcies where they’re non-voluntary, personal insolvency and debt agreements are when, it’s a less formal form of bankruptcy, where you go to your creditors and work out an negotiation arrangement. So yeah, most of it is done by creditors attacking people in Australia, and that hasn’t happened because of these changed law.

In terms of business related insolvencies, we can see that it fell, and then it started to spring up at the end of March. And we’re going to see a massive spike come September, both in personal insolvencies, that’s individual, so people who can’t pay their credit cards or their mortgages or whatever, and the creditors, the people they own money to, take them down, make them bankrupt. Again, we’ve probably got, the ATO is one of the biggest creditors in Australia in terms of taking people through the court system and bankrupting them, just to set an example.

More recently with COVID, the ATO has been very lenient, but that will have to come to an end as well. And similarly, businesses have been given a break on the rent, on their mortgages if they own assets of any sort, and also on their repayments and debts owed to the government ATO payments, they’re being given stimulus packages, all sorts of lifelines and changes of insolvency laws, that are going to come to an end at the end of September.

So if we look at our economic growth, we have always had, even quarters of negative growth, we’ve never had two in a row. And what the international monetary fund forecast is for 2020, we’re going to go heavily into debt, but we’re going to spring back in 2021, and further into 2022. So this will only last, they say, they predict, a matter of a year, or maybe even less in Australia. And we’re already seeing signs of, yes, we’ve got bad times ahead, but a light at the end of the tunnel.

The other thing that we’re seeing, as you can see here, lower insolvencies. So this is month by month from this time last year, much lower in April than any other time. Lower in January too. The court goes on holidays over the January period, so you tend to find court filings for winding up of companies, or sending people bankrupt, is much lower in January. It’s unusual to see it’s so low in April, but of course that’s when the laws changed, they changed late March when we went into lockdown to give companies breathing space. So this figure is artificial, it will stay low for a while, and then come the end of September, a lot of it will hit the fan.

Business confidence, though, is getting better. So what we can see is, from January, we see it was pretty low in February, we had the Bush fires and that sort of thing, but come March, it hit all time low. And then April, it got a little bit better. May, it’s still in negative territory, in other words, more businesses are thinking things are worse and going to get worse before they get better than businesses thinking positively. But at the end of the day, what it does mean is that the trend is upwards. It’s going from bad to less bad.

Let’s have a look at applications to court to wind up companies. So what we’re seeing there is we’re seeing the government, the red line is government wind up applications. The purple line is private company, or creditor applications. And the blue line is the ATO. So the ATO have gone easy on the economy, the ATO want things to get a bit better, and it’s unusual. You can see that traditionally the ATO are the highest that would chase a company, and they’ve now gone to the lowest. Whereas the purple line, private and other government insolvencies, the purple line being private creditors was on the rise. So it meant that companies were getting into trouble, come March, and they’ve bought themselves some breathing space.

And that’s just the facts. We had a lot of debt in our system, in the business world, and in our private sector, and for individual moms and dads, we’ve survived on debt for a long time. We’ve avoided a recession for 30 years because we’ve all borrowed money and we’ve spent borrowed money, but now we have to repay that with our own money, and 600,000 people lost their jobs in April. There are people that are not earning, there are businesses that are not open or are unable to recover, and that’s all just going to snowball for the end of September.

Consumer confidence, though, is better. People are feeling better. Businesses are feeling that things have gone from bad to less bad, and similarly, consumers who were in lockdown in April have come out in May and June, and we’re back to near normal levels. We’re almost back to where we were in 2019, so people are feeling better about going out and spending. We’re in recovery mode. You can see what I’m talking about here. Can you see the trends that there’s probably a false sense of security, because we’re surviving on JobKeeper and stimulus packages, but we’ve been through a bad time, historically really not that bad. I mean, people went through wars and depressions, but we haven’t had anything really bad, we haven’t had a recession for 30 years, so we felt that lockdown was the end of the world. And suddenly it’s like the war is over, we’re free again.

So the economy is feeling good, people are feeling good and they’re going out and spending, which is a good thing. But it’s not going to last forever. So this is a massive heads up to you that there’s still pain to come through the system, and when we’re going from bad to less bad, there’s going to be a critical mass and what a lot of people hitting the wall, and there will be an opportunity there in the property space, as well as the distressed business space.

The property space is doing a little bit better. You can see why they brought in, in order to keep jobs, why they bought in the HomeBuilder package, because people were not buying new homes. Look at that, they’re the new homes that were bought over the last year, and look what happened in April. There was just no activity in the marketplace. So what the government said is, and this is the data they look at, “Okay, there’s massive jobs in construction, we’ve got to stimulate that part of the economy, we’ve got to get people in jobs, we’ve got to get people building homes, let’s divert some money to there.” Hence we had the HomeBuilder package, and we talked about it last week, it’s been taken up in spades.

Developers left the market, so they had negative territory this year in several months of the year, where developers weren’t putting in applications to build. And that’s a forward indicator. When they see nothing coming in the pipeline, they think, “Well, that’s a huge sector of the economy where we’re going to lose a lot of jobs, a lot of economic activity,” because properties a big driver of our market, hence the home builder package. And we can see there what happens, they call it the vacuum effect. The vacuum effect is when the government diverts resources to a certain sector, we will see a spike.

So what you’re seeing there is when they allowed the temporary first homeowners grant, you saw a massive spike. What that means is, people in the economy who were already thinking of buying their first home, who probably had their loans pre-approved, who’d been looking at properties, they all race in, but they just soak up the stock. You see a spike, and then things go back to normal. So it probably doesn’t encourage anyone who wasn’t already thinking about it or going to do it anyway, it just corrals them into a spike for a month or two when it’s first announced. And that’s what’s going to happen, they’re predicting now, with the HomeBuilder’s [inaudible 00:21:26]. Anyone who was thinking, “I might renovate, I might build,” is now being sucked out of the market and into that area. They’re going to claim their 25 grand, and then that’s going to be the end of it.

The other thing that we’re seeing there is auction clearance rates from the weekend for property pretty much where it was this time last year. So higher clearance rate in Sydney than this time last year, and stock on the market, auctions held, pretty much like for like. So the property market is holding up, but as we said, like insolvencies, like businesses, it’s because people are still on life support, people aren’t feeling the pain yet that’s going to come through the system because of government stimulus packages, grants, that sort of thing, and people being forgiven their loan repayments. So there’s going to be a day of reckoning there.

And then finally, the auction results, you may not be able to see this, but would you like me to post the slides? Just leave a comment there if you want to see the auction results on a more granular level by cities and areas and states, and I can post that slide if it’s too hard to read. But basically the property market has held firm. And what we’re seeing then big picture is that there are individuals with a lot of debt, there are companies with a lot of debt, that have not really had the damage flow through the system yet. They’re surviving because they’re able to, because the government has facilitated it. They’ve said, “Let’s just have a pause, let’s keep everyone afloat for the moment, but the economy will have to start running by itself, we’re going to withdraw stimulus, we’re going to withdraw all of these incentives that we’re giving people, and debt will have to be repaid.”

Some people will use the breathing space to get into a better position, and then when we take off the life support there’ll be able to repay debt, to breathe them on their own, to bring in sales. Similarly, other people are the zombies. There are zombie businesses that are just not going to, once we turn off the life support, they’re not going to be able to bounce back. But as an economy, as a whole, it sounds terrible, but it’s pretty Darwinian, it’s survival of the fittest. It’s like the horse and cart, you just can’t bring inefficiencies forward, it’s going to drag back the rest of the economy. So these things have to be winnowed out. And that all happens in a recession. A recession cleans out the dead water, and at the end of the day, you’re either green and growing, or brown and rotting.

And that’s why I’m so excited about sharing and bringing Gary Vee to you live Saturday week, because he will be showing you where the opportunities are, how to get on the front foot, and how to take advantage of the trend right now, especially with a recession, first time in 30 years, coming on board, and what’s going to happen with our economy. And in particular, he’s got an affinity with Australia, if you’ve heard of them, his father’s business that he took from a couple of million to a massive $60 million business, and he did that with an appreciation of why. So loves Australia, loves the Hunter Valley, loves all our wines here, and has a passion for Australia. So he’s going to share all that with you in a couple of Saturdays, and it’s going to be a game changer in terms of opportunity. If you’re able to adjust your paradigm to the new reality. If you can change what’s in your head to fit the reality of our economy and our markets right now, you’re in the right place at the right time.

As always make sure that you share this message with friends and family. This is to empower others, we want a ripple effect. This like-minded community wants to share knowledge and empower people. We’re the average of the five people we hang around, so you want those to be people who are inspiring you, probably who are even better than you doing better things than you to pull you up in the slip stream, and to become your new normal. And make sure if you’re tagging in friends and family, you can do that in the comment section, and follow us on Facebook, make sure you subscribe and hit the bell, and we can give you a heads up when we’re bringing out new content.

As always, though, in the meantime, stay safe, take care, make sure you go to the link in the comment section and pre-register for our upcoming live streams this Saturday and next Saturday, where we can deep dive more into the strategies and the tactics about exactly what you need to do now, and why, to position yourself for the new normal and the really bright future ahead. Otherwise let’s stay close and talk on Thursday at our 402. See you then.