Nearly 38,000 firms at risk of failing

Tuesday 12th May 2009

Nearly 38,000 firms are rated a higher risk failure and a further 44,000 are likely to severely fall behind in the payment of their trade accounts, according to a Dun & Bradstreet report.

Close to 82,000 New Zealand firms have had their risk or payment profile downgraded since January 2008, an increase of 28% from the previous 15 month period, according to the credit reporting agency’s report.

The outlook for trade credit was “deteriorating severely” and hindering the ability of firms to trade with one another. D&B quarterly trade payments analysis showed that New Zealand’s business-to- business payment terms were three weeks longer that the standard term during the March quarter.

“Downgrades on this scale are a clear sign that many businesses simply weren’t paying close enough attention to risk management and cash flow,” said general manager John Scott.

“More firms have become a higher risk of paying their bills late than actually failing” in a sign cash flows will continue to tighten, he said.

The report found the communications sector was the most at risk of failure, with almost 18% of firms at a greater risk of failure, and almost 21% more likely to repay trade accounts significantly past their due date.

Around 16% of electric, gas, and sanitary services were downgraded, and more than 21% of these firms were found to be a greater risk of delinquent payments.

The survey found younger firms accounted for the highest number of downgrades, with 12,711 companies aged between five and nine years having their risk rating revised down, and 14,171 firms in the same group deemed more likely to make late payments.

Rating agency Standard & Poor’s put the nation’s AA+ foreign currency credit rating on negative watch in January, as the current account deficit ballooned to 8.6% of gross domestic product. The deficit widened to 8.9% in the three months ended December, but Treasury predicts it narrowed back to 8.6% in the first three months of this year.

Prime Minister John Key and his Finance Minister Bill English predict the government’s budget on May 28 will allay the rating agency’s concerns about the economy, and avert a credit downgrade. Both have reiterated that the government will keep on top of the nation’s debt.

Lower interest rates have made credit more affordable in New Zealand as the central bank slashed the official cash rate more than 575 basis points to a record-low 2.5% in a bid to lift the economy out of its first recession in a decade.

Scott predicts the economy will deteriorate further before it recovers, and will likely lead to a reduced focus on business development and investment.

“Businesses can’t stick their head in the sand and hope it goes away," he said. "They need to gain a clear understanding of their exposure to both failure and late payments, and manage their customers and suppliers accordingly,” he said.

Businesswire.co.nz

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