Businesses in distress: 13 per cent rise in company loan defaults

Wednesday, 6 October 2021

Chef Luis Cabrera and his wife Cecilia Lara owned a Mexican restaurant in Auckland’s Elliott Street, but it closed as a result of Covid lockdowns after trading for 11 years. The debt from that business remains with him because of personal guarantees he gave.

Restaurateur Luis Cabrera has been given a three-month stay of execution on the loan from Australian lender Prospa which he took out last year to try and save the central Auckland restaurant he set up 11 years ago.

The Besos Latinos restaurant in Elliott Street closed its doors for good in October last year, crushed by Covid lockdowns, which followed a downturn in business caused by the City Rail Link construction project.

But Cabrera, who is working for a reduced wage subsidy salary at a sister restaurant of the same name in Wynyard Quarter, said: “I’m honest with them. I’m not in a position to make any payments.”

He’s among many business owners, and former business owners, sinking under debts incurred to survive the multiple rounds of trading restrictions imposed on Auckland in a bid to eliminate Covid. Credit reporting agency Centrix said defaults by companies on their loans rose 13 per cent in the last three months.

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“It's an absolute mess. Company closures. Company defaults. The last quarter has seen a 13 per cent increase in defaults, and it’s trending up,” Centrix managing director Keith McLaughlin said.

Hospitality businesses have been especially hard hit, and many could not break even providing click and collect takeaway services.

The Restaurant Association has called for targeted support for hospitality businesses, but as yet the Government has not moved to provide it.

Cabrera, a father of young children aged six and three, said his debt had risen since the restaurant closed by around $10,000 with default fees and interest to over $45,500, he said.

He faced a court hearing in mid-October over the debt, but though he worried the hearing could lead to him being bankrupted, he could not find any legal aid lawyers to represent him.

During the interview with Stuff, Prospa called Cabrera to say it would freeze his loan for three months recognising the Auckland lockdown was making life hard for him.

“I was having a bit of a chat to management in regard to your situation, and they have offered to put forward a three-month moratorium on your loan. What that basically means is we can put a hold on everything for the next three months to the end of the year to allow for your situation to improve,” a Prospa representative told Cabrera.

The court hearing had been called off, Prospa said.

Restaurant Association of New Zealand chief executive Marisa Bidois has lobbied hard for financial support for hospitality businesses from the Government.

“The next time we speak, we need to have some sort of plan in place,” Prospa told him.

Cabrera said the emotional toll taken on him by the debt was less terrible than during the first national lockdown in 2020 when he was trying to save his Elliot Street restaurant.

“First time we felt we were hitting a hard rock. We didn't know what was going to happen. I even thought potentially they might put me into jail because I hadn't paid my debt. I hadn’t paid my GST. I didn’t pay the rent,” he said.

The last three months has seen company credit defaults rise 13 per cent, data from credit reporting bureau Centrix shows.

That awful uncertainty was what other hospitality business owners still struggling to save their businesses faced.

While the removal of gathering numbers in alert level 2 areas was welcome, Auckland venues in level 3 were still hurting and needed more help, according to the Restaurant Association.

“The Auckland hospitality industry has time and again been disproportionately affected by the pandemic, and it is time that our Government recognised this by providing financial relief that is specific and targeted to our sector,” Restaurant Association chief executive Marisa Bidois said.

Centrix chief executive Keith McLaughlin says Covid restrictions are creating a mess of many businesses.

The wage subsidy was an employee benefit, and was not designed to keep businesses afloat, McLaughlin said.

As well as companies missing payments on their debts, McLaughlin said the rate of company closures remained high, and company registrations fell by 11 per cent.

He said the figures showed the reality of life for business owners in Auckland, especially the property, transport and hospitality companies which made up the bulk of those missing payments.

“It’s been seven weeks, and there’s no end in sight,” McLaughlin said.

“They survived 2020, and were just starting to get back into their feet, and they are put back into lockdown again,” McLaughlin said.

The uncertainty of when Auckland trading would return to normal meant people did not know what to tell their lenders, and their landlords, he said.

He said Prospa's debt moratorium for Cabrera reflected actions taken by many lenders.

“They are sympathetic,” he said.

The easing of lockdown restrictions in Auckland, which meant people could meet others in open areas like parks, did not yet amount to a cause for optimism, McLaughlin said.

“Business owners whose companies are going broke can go and have a picnic in the park. How does that help them?” he said.

Outside of Auckland, things look much better for business.

Now at alert level 2, the rest of the country had seen credit demand fully recover to pre-lockdown levels, McLaughlin said.