Liquidations to rise as business costs soar

Oscar Grobler, head of commercial products and financial institutions at Absa Corporate and Business Bank, says liquidations rose 7.2% in the first five months of this year. The higher number of liquidations is expected to continue this year as companies battle rising interest rates, commodity prices and sluggish consumer spending.

He says banks may experience non-performing loans from small business in particular in the next 12 months, sparking a wave of liquidations.

Grobler says Absa already has about 15 small transport enterprises that are three months in arrears. The companies' combined outstanding capital is R82m.

SA's economic downturn hit retail banking first and then spread to corporate banking 12-18 months later, suggesting that some time next year more companies may face liquidation, he says.

Gert Kruger, head of credit portfolio management at FirstRand, says he expects smaller companies to experience some financial distress in the next 12-18 months if interest rates remain high and economic growth remains slow.

He says this might result in “an uptick in the number of liquidations”.

He did not give specific figures as the bank is in a closed period.

Last year the value of nonperforming loans rose 56.4% from R18,8bn in December 2006 to R29,4bn last December, according to the Reserve Bank. Nedbank chief economist Dennis Dykes says this was “off an extremely low base” and was probably boosted by debt- distressed individuals and households.

Dykes says companies that are vulnerable to the consumer sector may default on loans later in the economic downturn and this may result in liquidations.

Mike Schussler, chief economist for T-Sec, shares this view. “We will see more liquidations in a year,” he says.

Grobler says the bank tries to avoid non-performing loans by keeping credit lines open for certain financially frail transport companies and firms in other sectors that are on the verge of liquidation.

“Liquidating a business that is in dire straits is destructive and a weak strategy for a lender to recover its money,” Grobler says.

“It puts a lot of people out of work and destroys businesses that could potentially recover and do well in the long run.

“Although many businesses are financial distressed, the fear of the bank liquidating using a fire-sale approach to recover its money is no longer on the table.

“Neither is reckless lending by a banking institution,” Grobler says.

He says the bank goes through its loan books often, and approaches customers it suspects are under financial duress. It tries to offer support to companies that have viable business models, and will only pull the plug on companies that are “seriously troubled” or “financially unsound”.

“By offering business solutions, such as meeting short- and long-term capital needs and providing employee benefit advice to businesses affected by the economic downturn, businesses can overcome the short-term bear market and thrive in later bull markets.”

He says the bank resuscitates an average of 10-15 businesses a year.

Lenders such as banks apply for the liquidation of a failing business in order to sell its assets and recover at least a part of the loans.

Last week, Nedbank put wheel and tyre manufacturer Tiger Wheels under provisional liquidation as the bank tried to recover about R63,6m from Tiger subsidiary ATS Light Alloy Wheels.

Grobler says the severity of liquidations and non-performing loans is not about the size or number of companies that struggle to honour their debt obligations, but rather the speed at which this happens.

“It happens so fast ... the speed is frightening,” Grobler says.

He cites the US subprime crisis which took only a few months to inflict considerable damage on US banking and the global financial system.

Source: Business Day

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