Market update – Australia March 2014
Market update – Australia
The Australian economy has been in a relatively subdued state over
the past 12 months, with little M&A activity occurring at one end, and
little distress at the other. Most people sat in the middle, walking on
eggshells until a definitive economic direction could be determined. More recently we have started to see some signs of activity in the
M&A space, IPOs and an increasing preparedness by clients to
restructure. After surviving the post-Lehman era predominantly
off the back of a buoyant resources sector, parts of the Australian
economy are emerging as still requiring repair. Some are now asking
whether a failure to take our medicine with the rest of the world will
ultimately cause us more harm than good.
Industrial relations issues have come to the fore with the exit from
automotive manufacturing in Australia by Ford, General Motors and
Toyota and more recently job cuts at Qantas. There are sure to be
movements in this space from legislators.
It would be wrong though to compare Australian industrial relations
to our Asian neighbours, albeit they remain an important influence in
the transformation of the Australian economy. What is of concern is
our current inability to effectively compete with other developed markets
in certain sectors because of our industrial relations environment, in
particular wage rates.
Large corporates and investors have delayed investment decisions
due to uncertainty in government policy. The election of the
Coalition Government in late 2013 is expected to lead to the
withdrawal of the mining and carbon taxes and provide more
stability in decision making.
With comparatively high labour costs, we are seeing many Australian
businesses unable to generate sufficient returns to attract capital.
Herein lies the real predicament for Australia. Unlike many other
developed countries, Australia is a net importer of foreign capital, to
the tune of $0.83 trillion. As a consequence, our economy is unable
to replicate the injection of government and corporate capital support
achieved in other countries such as Japan. Consequently, unless a
restructure in certain sectors take place, we are likely to hit a capital wall.
With Australia’s unemployment rate at 6% we have benefited from
the resources sector which absorbed losses from other ailing
industries. As issues in the resources sector have emerged, large
numbers of employees have been retrenched. When combined
with ongoing employee reductions in the manufacturing sector,
we expect the unemployment rate to break the 35 year average of
6.93% in the coming 12 months.
Of course, with shortages of capital in an already capital deficient
local market, investors are expected to become more prudent in how
they deploy that capital. With combined higher unemployment and
interest rates, we predict a period of distress, and corresponding
opportunities for smarter operators, in the next 12 to 18 months.
PPB Advisory’s depth of capability, unparalleled network and access
to deal flow make us well-placed to help clients navigate these
challenges and capitalise on the opportunities that may be presented.
The Australian dollar at circa USD0.89 has remained resilient
despite pressures from a weakening commodity lead boom, and
a gradual recovery in global economic conditions. Whilst there
remains downside risk to the Australian dollar, this has not come
quickly enough to attract sufficient capital to the agricultural and
ailing manufacturing sectors.
With a positive global and local outlook for Australasian agribusiness,
alternative sources of equity capital are needed to inject liquidity into
the domestic market and enable industry participants to capitalise on
opportunities presented by growing demand in global markets.
Australia has potential to exceed current capacity to feed an extra
40 million people and be a surplus food producer beyond the 2050
peak population forecasts. Superior returns in agriculture are
characterised by yield and commodity sale price. Scale, technology,
low overheads and input prices also result in more attractive returns.
Current structural challenges in agribusiness include over-leveraging,
poor succession planning and lagging productivity. A lack of secondary
investment in agriculture will continue to pose difficulties for exit
strategies or traditional restructuring, not just for investors but also
for financiers and agribusinesses.
The Government’s decision at the end of November 2013 to not allow
Archer Daniels Midland’s proposed acquisition of Graincorp poses
further liquidity challenges for agricultural assets if ultimately the
discretionary ‘public interest’ rationale is given precedence and weight.
Increasingly we are called on to optimise agribusiness assets through
recapitalisation from alternative sources, both domestic and foreign.
PPB Advisory has an agribusiness team of 25 specialists who
currently directly manage more than $300 million of agricultural
assets around Australia (covering more than one million hectares)
and also advise financiers, investors and agribusinesses on another
$400 million of assets.
Debt and equity markets for mining and mining services companies
have largely been closed for a protracted period of 18-24 months, and
remain so. Companies with significant exploration phase exposure
are most at risk. These companies include:
• surface drilling manufacturers and operators
• analytical laboratories
• remote survey operators.
Mining companies are cutting costs by suspending new development
projects and bringing mining contracts ‘in house’. This has led to an
oversupply of mining contractors and overly-competitive pricing
on tenders. A significant number of these mining contractors are
poorly diversified with respect to commodity type and location.
This is a major risk given the immediate impact a ‘termination for
convenience’ can have on a company’s cash flow.
The outlook for iron ore remains positive, with the long term outlook
of $100-120/t (Free On Board) Australia being sufficient to cover all
Australian iron ore producers’ costs. The outlook for thermal coal and
coking coal is not so good. Significant expansion over the past 5 years
has seen an increase in export volumes not only from Australia, but
also from the US and Indonesia. This increase has been at historically
low prices and there is no expectation that prices will increase as
production continues at record levels.
PPB Advisory’s resources and infrastructure team is well placed to
help companies navigate these challenges, having been involved as
project managers, bid managers, independent experts, investment
advisors and dispute consultants on numerous resources and
infrastructure projects over the past 20 years.
Breadth of recent experience
Advised on a scheme
arrangement for the Board
to ensure the AUD3.4b
debt was successfully
converted to equity very
experts to the scheme,
with a substantial report
filed and accepted by the
Court, including the
provision of valuation
advice to the Board.
owner and operator of
AirportlinkM7, a major toll
road in Brisbane. Working
with a global syndicate of
banks (holding debt of
approx. $3.3b) to develop
and maintaining role of
receivers and managers
to ensure the business is
strengthened by efficient
Adviser to Ludowici in
relation to its takeover
competing offers from
FLSmidth and Weir
is a leading mining
Adviser to Energy
Scheme on the sale
of FuturePlus, a
business, to Link Market
Engaged to wind down
the Australian arm of this
US investment bank with
assets of more than
$430m. The matter
involved significant cross
border insolvency issues,
including disputes in
as well as management
of complex financial
securities, CDOs and
credit default swaps.
In the distressed markets, we have seen the establishment of a
secondary funding market taking prominence in the buyout of distressed
assets from traditional banks across Australia. These financiers have
recapitalised the distressed market particularly in Queensland.
Australia’s automotive industry is set for a period of atrophy following
the announcements from Ford, General Motors and Toyota that they
will be withdrawing manufacturing operations permanently from
Australia between 2016 and 2017.
In the premium office space across Australia’s capital cities, 2013
was the most active year in the commercial CBD market since 2008.
Sales activity and prices for A-grade assets (particularly in Sydney
and Melbourne) were driven by strong competition between local and
offshore institutional investors (predominantly from Asia). We anticipate
a softening in 2014 due to contractions in tenancy demand. Nationally,
vacancy rates are at their highest levels and are expected to have
reached their peak. In contrast, the December quarter 2013 saw more
than $8 billion injected into the office market from domestic and foreign
investors, spread across Sydney, Brisbane, Melbourne and Perth.
Up to 200 tier 1 suppliers to the automotive industry will be directly
affected by these announcements. As a consequence, there will be
many restructuring opportunities in the industry over the next two to
three years as local suppliers look to diversify or invest in the Asian economy.
We are seeing a strong resurgence in the residential market, particularly
across New South Wales, Victoria and Queensland. For example, the
Victorian Government has just fast-tracked planning approvals on
five apartment towers (2,000+ apartments) in inner city Melbourne
After five challenging years, the Australian real estate sector is poised
for strong growth and investment activity, predominantly focused in
Sydney in the short to medium term.
PPB Advisory’s trans-Tasman team of advisers provides specialised
services for clients in the real estate and construction sector including
strategic real estate advice, restructuring, transaction management
and structured real estate finance. Recent experience includes
managing the completion of works on a $600 million residential and
marina development, acting as the lead project adviser to the lender
on a $100 million mixed use commercial, residential and marina
development, advising a banking syndicate in relation to project
monitoring, marketing, sales and retail leasing for a prominent
residential tower on the Gold Coast in Australia, and developing and
driving the divestment strategy of the property portfolio of a major
Australian not-for-profit organisation.
Receivership of RMWAH
and a number of its
subsidiaries including cattle
farming stations and a
farm supplying 80%
of the domestic organic
free-range poultry market.
Applying its hands-on
PPB Advisory increased
production and improved
margins and profitability
prior to sale of the assets
to optimise returns.
Advising the lenders of
construction delays and
solvency issues with the
builder. We continue to
lead negotiations with the
consortium members to
assist in assessing the
project’s ongoing viability.
The Federation of Automotive Products Manufacturers predicts a total
of 50,000 direct jobs will be affected or at risk from the withdrawal.
As a consequence, State and Federal Government are looking at
options to assist businesses to diversify and transition.
PPB Advisory is the only professional services firm at the Premier’s
Automotive Industry Roundtable which has been formed to discuss
how best to address the issues facing the industry. The Roundtable
consists of representatives from the manufacturers, unions, component
suppliers, industry bodies and government (South Australia, Victoria
PPB Advisory is working with various stakeholders to determine
what funding may be available to assist businesses to meet these
challenging times. Given our role in many of the discussions currently
taking place, we are well placed to assist businesses address the
challenges presented by these changes and access any assistance
and transition programs as they are established.
Appointed by NSW
Government to advise
on the restructuring
of a major infrastructure
initiative with assets > $2b.
Middle Eastern oil
Engaged to provide an
of the fair value of an oil
and gas exploration and
development project in
the Middle East with an
production of 7.2m bbls,
following the acquisition
by an Australian registered
company of a controlling
interest in a Middle
operating in the oil
and gas industry.
Reviewing a valuation
report produced by a
Big 4 accounting firm
in New York which was
used to allocate value
to the global generics
business of a German
a US$7.0b takeover
by a US based
PPB Advisory is one of Australasia’s leading professional advisory firms. We have been providing
strategic, operational and financial advice to companies, government bodies and financial
institutions for 30 years. From complex business problems, involving multiple stakeholders
and jurisdictions, to individual business challenges, PPB Advisory is trusted by clients to deliver
successful outcomes, skillfully and sensitively.
Contacts at INSOL Hong Kong 2014
Insol 2014 Conference Co-Chair
t: +61 3 9269 4207
m: +61 417 009 925
e: [email protected]
Vice President and Treasurer of INSOL International
t: +61 2 8116 3020
m: +61 419 217 732
e: [email protected]
• Restructuring and turnarounds
t: +61 3 9269 4135
m: +61 408 016 517
e: [email protected]
• Corporate advisory
• Forensic services
• Insolvency services
Health and aged care
Hospitality, tourism and leisure
Real estate and construction
t: +61 3 9269 4136
m: +61 414 921 241
e: [email protected]
t: +61 2 8116 3295
m: +61 414 226 224
e: [email protected]
Important: This information is not advice. Readers should not act solely on the basis of information contained in this document. We recommend that formal or independent advice
be sought before acting in the areas covered herein. 00665PPB. March 2014.
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