Oil price, interest rate hikes expected to tip companies over the edge

SA businesses have largely withstood the worst of Covid-19, but soaring oil prices and interest rate hikes loom as major threats to their ongoing survival.

Business insolvencies remain at near historic lows in South Australia, but soaring oil prices and the threat of interest rate hikes later this year are expected to tip more vulnerable businesses over the edge.

The latest Australian Securities and Investments Commission (ASIC) statistics reveal that just nine local companies fell into administration or liquidation in February, consistent with the number of failures in January.

They include energy storage company CCT Energy and Greens Organic cafe in Glenelg.

Greens Organic notified customers via Facebook that it had been forced to close its doors on February 25 due to the “relentlessness of Covid and the detrimental effect that this has caused on our business”.

It’s the latest in a long list of hospitality closures in recent weeks, including Second Valley’s Leonards Mill restaurant in January.

Piper Alderman partner Mike Hayes, who specialises in corporate insolvency and restructuring, said conditions remained extremely challenging for many hospitality operators despite the recent easing of Covid-19 restrictions.

“I’m aware that some companies in hospitality were keeping their doors open, hoping that they’ll make a recovery in mid-March, which is completely understandable,” he said.

“But I just shudder to think what would happen if there were further closures during March, in respect of the good folks that are trying to make ends meet.”

Oil prices are also a major concern, soaring to near all time highs of close to $US140 in recent days due to the military conflict in Ukraine.

The heightened inflationary pressures are expected to force the Reserve Bank into an earlier than expected move on interest rates.

Melbourne’s Probuild fell into administration on February 24. Picture: Ian Currie.

Mr Hayes said that would pose a major challenge for leveraged businesses and households.

“You’ve got households paying a heavy premium for properties and able to survive now, but if interest rates increase, well, the company’s got to find the money for the overdraft and individuals are going to have to find money to pay the mortgage,” he said.

“I think an increase in interest rates is going to have a material effect on households, and my concern is the fuel price. That is going to have a significant impact on everybody.

“I think it’s fair to say we’re going to be in for a tough ride. There’s a tough road ahead for everybody. We’re just going to have to tighten our belts and try and ride through it.”

The collapse of Melbourne-based Probuild headlined last month’s list of national insolvencies. And while the construction sector is seen as vulnerable due to materials shortages and other pandemic-related challenges, there have been few business failures in the South Australian market.

Mr Hayes fears many operators in construction and other industries may still be surviving on the government stimulus handed out during the height of Covid-19.

“I query the status of those companies and whether they are in fact zombie companies that have been trying to recover government incentives as much as possible,” he said.

“What is going to be in those companies when ultimately they do get wound up? Is there going to be anything in them at all?”

“It would be prudent to do any due diligence if you’re providing your services on credit, or alternatively get some form of security for those services to the extent that you can.

“The level of (ATO) debt is significantly higher post-Covid than what it was pre-Covid, and common sense tells you that there are going to be recoveries and there are going to be casualties.”