Brace for a balance sheet recession

Australia could be heading towards a balance sheet recession that would take a number of years to come out of, a private equity manager has warned.

“A balance sheet recession is where the asset price bubble has burst and companies are forced to sell assets at below previous valuations,” Allegro Private equity managing director Adrian Loader said.

“The banks will want companies to repair their balance sheets and minimise debt in this type of recession.” He said we would see companies move away from profit maximisation to debt minimisation.

Even with lower interest rates, businesses do not go and borrow more money, they tend to save to reduce debt, he told a Dealer Group restructuring workshop in Melbourne.

“The economy will not enter into self-sustaining growth until balance sheets are repaired.” In Japan, when interest rates were reduced to zero, this is exactly what happened and that cycle lasted for about 10 years.

“Banks want their money back and it is difficult to sell assets at present because there is no market,” Loader said.

“It is a difficult type of recession because there is no finance available, so there tends to be a longer period of underperformance.”

And the longer the recession lasts, the more companies will need cash to survive.

“There will be no easy way to restructure companies that are in trouble,” he said.

“They have just got to start the process, [and] that will be long and hard.”