Commodities

A glimmer of hope exists in the commodities market. As we predicted, the downturn in the commodities cycle troughed in January 2016 (Cameron Belyea, Financier Worldwide). Most metal prices recovered in the six months ending in June 2016 and may be stabilising, though there will continue to be pricing shocks over coming months. For the balance of CY2016, precious metals and rare elements are likely to maintain strong pricing, while nickel and metallurgical coal has come back well over the past few months. This bodes well for revenue stabilisation across a range of mining enterprises. That said, the market has a long way to go to restore value ‒ Australian Bureau of Statistics data show the capital value of metal ore mining reduced in FY15 by 12.9% or $9b, related to falling commodity prices. The upturn seen since January 2016 has not fully restored value. 

Capital raisings

We are also starting to see signs of a new wave of capital raisings as those across mining services, mining more generally and some industrials engage in balance sheet repairs ahead of any market uncertainties in FY17. 

Security enforcement

In the credit value industry, we expect heightened scrutiny will make security enforcement more difficult. Accordingly, we expect that restructuring options, where viable, will remain a strong focus, particularly in the current economic climate. In this respect, boards of impaired ASX entities will see Atlas Iron as a beacon for early engagement of turnaround advisers. 

Security arrangements

We expect the Forge decision (when handed down) will impact on the way lenders structure their security arrangements, particularly in the construction sector. The precise impact will depend on how the Court views the relative strengths and weaknesses of a PPSA security interest in an insolvency situation. For instance, if Hamersley is successful, this may prompt lenders to impose more costly and onerous security arrangements on borrowers, because of the risk that the lender could lose its security to a third party contractor through insolvency set-off. If the receivers succeed, principals will need to revisit how they guard against contractor insolvency risk, which may include higher upfront requirements from contractors, potentially making it more difficult to secure larger, higher value contracts.

Where rehabilitation is not possible, mainstream financiers are likely to move from a forbearance mindset to seeking to exit relationships with impaired creditors. Ignoring agribusiness, this will likely entail limited enforcements, favouring slightly discounted to par trades or refinancing from debtor raisings (capital or new offshore capital). Reporting and capital requirements (Basel III, APRA and increasing costs of offshore funding) will also impact on trends in this sector.

Brexit

The prospect of Brexit has sent shock waves globally and creates uncertainty in the market, particularly over when Brexit will happen. Prime Minister May recently announced that the United Kingdom will formally invoke Article 50 of the Lisbon Treaty to begin the two-year negotiations to exit the EU by the end of March 2017 and a "Great Repeal Bill" will soon be put to Parliament to avoid all European law.

When Brexit occurs, while its purely domestic insolvency laws will be unaffected, the UK will lose the benefit of the EU's uniform cross-border insolvency laws. Additionally, UK rulings under domestic law on receivership, schemes of arrangement and liquidation could lose the automatic recognition and enforceability in the EU that they currently enjoy. In the short term at least we expect to see an impact on the pricing of, and the appetite of purchasers for, distressed debt involving UK assets, and the UK may lose some of its appeal as the choice of contracting jurisdiction until stability and consumer confidence is restored. 

Safe harbour

While the Federal Government has allowed the industry an additional six months to implement many of the Insolvency Law Reform Act 2016 reforms, it is pressing on with the second tranche of reforms to enhance business rescue and support entrepreneurship as part of the National Innovation & Science Agenda. Nonetheless, our expectation is that the safe harbour reforms will not be part of Australia's law by the end of this financial year.