The Merger and Acquisition (M&A) market experienced a slowdown in 2023, attributed partly to reduced valuations and hurdle rates. However, Gayle Dickerson, Head of Turnaround & Restructuring Services at KPMG, anticipates a rebound in 2024.
Dickerson notes a shift in liquidity options for Australian businesses beyond traditional banks, with various global and local alternative credit and capital providers eager to fund distressed deals. While these alternative avenues may offer different risk assessments and valuations, they often come with higher costs.
“Unlike in previous periods of economic uncertainty in Australia, businesses have access to a different type of liquidity outside the big banks, with a raft of global and local alternative credit and capital providers looking to fund distressed deals. This alternate capital market often takes a different view as to risk and valuation of the business or its assets than traditional financiers, however this can come at a higher cost, Gayle Dickerson says.
These observations coincide with the release of the KPMG Financial Performance Index (FPI) report for Q4 2023, which paints a sobering picture of distress among companies headquartered in Australia. It shows companies headquartered in Australia faced the most distress globally with the largest average decline in KPMG FPI scores over the year falling by 10.80 per cent from 74.51 to 69.54. In Australia well performing companies typical score between 85-99 over their lifetime while scores below this range may indicate financial stress.
The report also highlights the presence of 2,335 global ‘zombie’ companies, with Australia ranking third lowest with 274 such entities in front of the USA (695) and Canada (439). Dickerson attributes this to unique challenges faced by Australian businesses, which have led to increased demand for turnaround and restructuring services among mid to larger corporates. “we’ve seen mainly small businesses impacted by insolvency which was driven by a range of pressures including tightening consumer spending, inflationary and interest costs and legacy taxation debts. However, from mid-2023 we have started to see more demand for turnaround and restructuring services from mid to larger and listed corporates.”
“Previously we’ve seen mainly small businesses impacted by insolvency which was driven by a range of pressures including tightening consumer spending, inflationary and interest costs and legacy taxation debts. However, from mid-2023 we have started to see more demand for turnaround and restructuring services from mid to larger and listed corporates.”
“These corporates are facing increasing pressures from rising costs of funding, input and salary costs, revenue and margin squeeze,” says Gayle Dickerson.
Despite recent poor performance, there are positive signs for Australian businesses in 2024 and opportunities for those in distress to turn around their fortunes.
“There are many options for Boards to explore, under the comfort of safe harbour protection, to restructure discretely rather than an insolvent outcome. Early consideration helps preserve value”.
You can find the full report and global FPI index scores at KPMG Financial Performance Index – KPMG Global.
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