Rise in number of Singapore companies being wound up

The sputtering economy here and overseas as well as rising interest rates are taking their toll on local firms, with an increasing number of companies shuttered.

Ministry of Law data showed that 25 companies were wound up in March, bringing the total for the quarter to 54, higher than the 40 cases in the final three months of 2022.

Small and medium-sized enterprises that lacked a sustainable business after Covid-19 hit have been the most vulnerable, noted Mr Chua Beng Chye, deputy head of restructuring and insolvency at law firm Rajah & Tann Singapore. 

“These companies did not have the agility to adapt to the new post-pandemic economy,” said Mr Chua, who has been involved in major restructuring and insolvency cases here, including those of Hyflux/Tuaspring, Swiber and China Aviation Oil. 

Funding costs have spiked over the past six months. One benchmark lending rate, the Singapore Interbank Offered Rate or Sibor, has shot up nearly 350 basis points.

Mr Xavier Jean, an analyst at S&P Global Ratings, said: “That has created a substantial additional burden on smaller companies.

“(These) generally rely much more on short-term debt funding, especially in working capital-intensive sectors such as construction, trading, retailing and restaurants, real estate development as well as raw material-heavy manufacturing.”

Exporters, especially those in cyclical sectors like technology, capital goods and machinery, are more sensitive to the slowdown in Western economies, notably Europe and the United States. This, coupled with persistent inflation and rising funding costs, will hit their bottom lines.

“Larger companies, on the other hand, tend to have more diversified funding avenues and, oftentimes, more scattered debt maturities, so the impact of rising interest rates is more moderate,” Mr Jean said.

Winding up a failed firm is no quick fix, however, as Ms Felicia Tan, partner in litigation and dispute resolution at TSMP Law Corp, noted.

Ms Tan said applying to the court to compulsorily wind up a debtor company is not the first choice for most creditors as the recovery rate in distressed liquidations has always been nominal. 

“Creditors and companies in financial distress have many other options apart from liquidation, which is a last resort for most. Negotiation of a debt restructuring involving debt deferment or haircuts is quite common and helpful to all stakeholders,” she added. 

Individual bankruptcy applications also rose in the first quarter. The Ministry of Law noted that there were 959 applications, up 6 per cent from the preceding quarter and 22 per cent higher than in the first quarter of 2022. 

Mr Chua Han Teng, DBS Group Research economist, attributed the rise to a “combination of factors, including soaring interest rates at a time of high inflation, coupled with softer economic growth, which made debt servicing tougher for some”.

Professor Lawrence Loh, director at the Centre for Governance and Sustainability at NUS Business School, reckoned that there was also a continued delayed effect from Covid-19. “The impact of the pandemic has lingered on for sole proprietors and smaller businesses, and this may work into the personal financial situations,” he said.

“Further, many of the budget support measures have ended as the economy enters into a post-pandemic recovery phase.” 

However, DBS’ Mr Chua is not expecting a significant rise in individual bankruptcy applications over the coming months, as “Singapore household balance sheets are broadly healthy, even as higher-for-longer borrowing costs amid an uncertain economic climate might add to some debt repayment difficulties”.

Property consultant Knight Frank, meanwhile, is seeing the sale of more properties that have been repossessed after borrowers defaulted on their loans.

There were 32 such listings in the first quarter, up from 10 in the preceding three months. These included 18 residential properties, up from eight in the last three months of 2022.

Ms Sharon Lee, head of auction and sales at Knight Frank Singapore, said: “The higher number of bankruptcy applications filed would likely result in more mortgagee listings, especially for workplace properties, in the second half of the year.”

High funding costs are expected to persist until 2024, given the rate-hiking policy being followed by the United States Federal Reserve. 

Mr Jean noted: “The full effects of rising rates on slowing Western economies haven’t fully manifested yet, so we expect export demand to remain a bit contained for the rest of 2023 as well, with inflation pressures persisting.

“So the more challenging environment for Singapore corporates, especially the smaller ones, is likely to continue throughout 2023.”

Bumpy Road

DBS’ Mr Chua added: “Externally oriented sectors, such as manufacturing, wholesale trade and financial services, saw a pickup in business cessations on a year-on-year basis amid challenging global external conditions in the first quarter.

“However, business cessations in sectors such as retail and food and beverage services dropped as they benefited from the post-pandemic reopening impetus.”

Mr Chua expects “global economic headwinds from tight monetary policy in advanced economies and lingering geopolitical tensions to put pressure on vulnerable businesses”. “But a more visible positive impact from China’s reopening to be seen in the second half of 2023 should prevent a significant increase in business cessations,” he added.

Businesses that had thrived during the pandemic, such as online services, may be at risk as more consumers are pivoting back to physical stores, noted Prof Loh.

Source: Straits Times © SPH Media Limited. Permission required for reproduction.

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