Dividends to be frozen as earnings decline

Dividends to be frozen as earnings decline

Katherine Jimenez December 18, 2008
Article from: The Australian
A FREEZE on dividends is set to sweep across parts of corporate Australia, as company earnings and cash flows come under pressure.
Tony McGrath, chairman of corporate advisory and insolvency firm McGrathNicol, said that few public companies had cut dividends so far, but that would change soon.
"We will see that because earnings will decline but, more importantly, cash flow will be under pressure," he said.
"With the challenge of managing your debt load, why do you want to leak some of your cash flow to your dividends at this moment?"
The large volume of corporate loans due to mature in 2009 will add to the pressure.
A recent report by rating agency Fitch Ratings showed that the 2009 calendar year would produce a "maturity hump" of $3.4 billion worth of maturing commercial-mortgage-backed securities.
"Cash flow isn't something that boards normally have too much focus on," Mr McGrath said.
"I would suggest to you that that focus on cash flow is now amplified."
There would be pressure on the payment of dividends among large public companies, he said.
They would need to juggle the option of paying a dividend "versus debt retirement, versus the dangers of undertaking capital raisings", he said.
"I think all those questions need be considered by the boards of companies facing refinancing deadlines."
Mr McGrath, who has nearly 25 years of experience ni restructuring and insolvency, has a better picture than most of the state of corporate Australia.
His firm is currently the receiver for ABC Learning and the administrator of Allco Finance Group.
The firm was also called in this year by Australian banks to prepare accounts on troubled shopping centre owner, Centro Properties Group.
Mr McGrath said the economic conditions would get tougher in the next six months and warned that there may be more corporate failures.
Property, retail and mining are all expected to come under pressure.
"We are going to see both commercial and residential property face downward adjustments, even more downward adjustments than they've had to date," he said.
"I think you will find the valuation community is probably one step behind where the market is at, at the moment, because they need evidence ... before they can change values."
The overall economic outlook would depend on how US reforms fed through. "If that starts to provide some bite to the US economy, I think it's quite possible that things could start to look at bit brighter in the next six to 12 months," he said.
"The problem at the moment is people don't quite know where the bottom is. Until we get to that point, it's a bit difficult to look forward."