Senior debt holding Australian corporates back

September 27, 2016

Financial covenants proving a headache for businesses

More than half of Australian corporates (53.0%) say senior debt capacity is impacting their ability to access critical assets needed to improve productivity and growth. This finding comes as an all-time high of 67.8% of Australian businesses report they are affected by obsolete assets.

These are just two of the findings from the latest Alleasing Equipment Demand Index (the Index), which examines the current asset inventory and future investment intentions of Australian businesses.

The Index data indicates that corporates are unable to upgrade outdated assets because of financial covenants in place with their lead financial institution, a situation that is causing negative impacts such as decreased productivity and sluggish growth.

Examining the data on an industry basis shows that corporates in the agriculture, forestry and fishing sector are the most affected by senior debt at 48.7%, followed by mining and resources (46.2%) and construction (42.7%).

According to Alleasing’s Chief Executive Officer, Daniel Blizzard, to remain competitive, enhance productivity and grow, businesses need to find ways to fund their capital requirements.

“The number of Australian corporates saying their senior debt arrangement is preventing them from accessing critical assets is quite surprising – one in two is significant. Anecdotally, we were aware of this problem but we were not able to quantify the extent of it until now,” Mr Blizzard said.

“Senior debt can pose an issue for corporates because there are often a series of binding rules that accompany it. For example, financial institutions often require companies to hit a pre-determined level of earnings to access further funds, or they can request additional security.

“For businesses looking to acquire new assets, particularly if they are specialised pieces of equipment, it can be difficult to find a funder with the appetite to lend.

“The industry data is particularly worrying, given those most affected are particularly capital-intensive sectors that require ongoing proactive management of plant and equipment,” Mr Blizzard added.

The fourth industrial revolution: robotics and automation

For those Australian firms that are considering investing, IT/big data (12.1%), services automation (9.2%), and artificial intelligence (6.0%) represent the most potential.

State-based analysis reveals that Victorian businesses are the most interested in robotic processes at 30.8%, followed by Queensland-based firms (30.6%) and New South Wales businesses (29.8%). When it comes to sectors, firms in the media and telecommunications industry indicated they are most interested in investing in robotics within the next year at 37.5%, followed by government agencies (36.0%), mining and resources (32.3%), then agriculture, forestry and fishing (31.9%).

As awareness of robotic processes and their associated benefits increases, Australian businesses will start to realise the benefits on offer. A September 2016 report produced by StartupAUS in collaboration with KPMG and the Queensland Government – ‘Powering Growth: Realising the potential of agtech for Australia’ – echoes this. The report looks at the agriculture sector and suggests there are untold new opportunities and significant benefits on offer for businesses if they invest in such technology, namely improved productivity and increased yields.

“Robotics and automation has are increasingly being talked and written about. This includes large companies publicly announcing their plans to invest robotic technologies, as well as government departments talking about the need for companies to start thinking about what resources and capital they will need to support the ‘fourth industrial revolution’. While the Index data has not painted a terribly positive picture about Australian business’ intentions in this regard, it is still early days in terms of adoption, so it will be interesting for us to track how this changes over the next year,” Mr Blizzard added.

The Index and ABS capex data: leading and lagging indicators of business investment

Continuing the theme of tracking future investment, with nine consecutive quarters of data now available from the Index, a correlation between is predictions and actual Australian Bureau of Statistics (ABS) data has been revealed.

Over the past two years of continuous Index research, the number of firms planning to expand their asset base initially remained steady before falling back during 2015 and then steadily trending higher throughout 2016. ABS forecasts matched the same trend; although initially flat before falling through late 2015 and recovering strongly in 2016. Importantly, the number of businesses seeking to decrease their asset base in the upcoming quarter has not changed in the past two years (13.9%) whereas those firms not planning a change in their asset base has decreased marginally from 62.7% to 60.6%.

ENDS


Further information:

Anna Frilingos

02 9850 5108 | 0409 599 911 | anna.frilingos@alleasing.com.au

About the Alleasing Equipment Demand Index

The Alleasing Equipment Demand Index is a quarterly index, which examines the current asset inventory of Australian businesses, as well as expectations for future investment. More than 1,200 firms that turn over $1-$100M are surveyed each quarter. These businesses have been broken into three segments: micro business ($1-5M annual turnover), SME ($5-20M annual turnover) and lower corporate ($20-100M annual turnover). The inaugural index was run during July and August 2014 – the research is executed by East & Partners on behalf of Alleasing.

Alleasing is a leading, independent provider of capital solutions. Established more than 25 years ago, we have financed billions of dollars’ worth of assets, supporting the capital needs of government entities and corporations across Australia and New Zealand.

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