High-Impact Insolvencies Double In H1 2024 Due To Sales Drop, Debt

CITR, the operator on the insolvency and restructuring market in Romania, announces that the number of companies which initiated insolvency proceedings in the first half of the year increased to over 3,600, compared to 3,401 in the first six months of 2023. Out of these, 72 are high-impact companies, with assets of over EUR 1 million, compared to only 33 in the same period of last year.   Regarding the number of restructuring applications via proceedings of arrangement with creditors, there were 71 applications in the first six months of the year, out of which 33 are in progress. 19 applications were filed by high-impact companies.   “It is important to understand that these high-impact companies are major contributors to our economy, and in order to help them, we must learn why they are in difficulty, and we need to make sure that both the mechanisms, and the mentality with which we approach them are adequate. The CITR team has identified five main factors which have caused their decline, namely liquidity problems and increasing operational costs, which caused increasing debts, decreasing demand and sales, and unprofitable management decisions,” Paul-Dieter Cirlanaru, CEO of CITR, said.   Why did high-impact companies initiate insolvency proceedings in the first half of the year?   The conclusions below are the result of an analysis of the financial and operational problems which companies with assets over EUR 1 million from various sectors of Romanian economy have faced: Liquidity problems: most companies have initiated insolvency proceedings because of liquidity problems. Especially, small and medium enterprises faced difficulties in managing cash flows and could not comply with their short-term financial obligations. Increasing operational costs: increasing costs with raw materials and energy significantly affected the profit margins of companies and caused them to no longer be able to pay their creditors. The most affected sectors were production and construction. Accumulated debts: accumulating long-term debts and the incapacity to efficiently restructure them represented another major factor. Numerous companies have not managed to renegotiate their payment terms or to obtain additional funding in order to support their activity. Decreasing sales and demand: decreasing demand on the national and international markets has led to a significant reduction of revenues for some companies, especially in the trade field. This was aggravated by inflation and general economic uncertainty. Management decisions: inadequate management decisions and the absence of a robust business plan were also factors which contributed to the insolvency of some companies. The absence of a clear strategy for managing crises and for preventing the materialization of risks was obvious in many of the analyzed cases. “In the following period, we will probably see a continuous increase in the number of restructuring measures, considering the resuming of the economic and regulatory context prior to the pandemic. Accessing restructuring facilities in due time is the difference between successful processes and those which unfortunately are implemented too late,” Paul-Dieter Cirlanaru, CEO of CITR, concluded.   Which were the most affected business sector in January-June 2024?   CITR has conducted a sectorial analysis of all the companies which initiated insolvency proceedings in the first half of this year, which provides insight into the challenges from each field and supports companies in implementing adequate restructuring strategies. Wholesale and retail: 26% of all the insolvencies was represented by the trade sector, affected by changes in consumer behavior, influenced by inflation and the increase of living costs. The reduction of the purchasing power caused a decrease in sales and, implicitly, forced many businesses to initiate insolvency proceedings. Construction: 20% of all the insolvencies was represented by the construction sector, which faced significant price increases for materials and difficulties in accessing funding. Economic uncertainty and delays in infrastructure projects also contributed to the instability from this field. Processing industry: 12% of all the insolvencies was represented by companies from this industry, affected by supply chain problems and increases in production costs. Also, fast technological changes and the need to adapt put additional pressure on the companies from this sector. Transportation and storage: 10% of all the insolvencies was represented by the transportation and storage sector, which were affected by the effects of fuel price increases and the global situation of the logistics sector. The decrease of the transportation volume and the increase of operational costs led to an increase in the number of insolvencies. Hotels and restaurants: 7% of all the insolvencies was represented by the hospitality industry, which continues to be affected by economic uncertainty and post-pandemic changes in consumer behavior. The increase of operating costs and qualified personnel shortages were determining factors of the increase in the number of insolvencies in this sector.   The regions which recorded the largest number of insolvencies are Bucharest with approximately 574 companies, Bihor with approximately 257 companies and Cluj with approximately 215 companies.   What will the economic evolution be in the next half-year?   “The macroeconomic evolution will be good in the next 6-12 months; we expect reasonable economic growth – more than 3%, a continuously decreasing inflation rate, towards the interval targeted by NBR, decreasing interest rates and the stability of the exchange rate against the background of continuing the inflow of European funds and foreign investments. Thus, we do not expect systemic events, such as recessions or crises, neither on a general level, nor on the level of most economic sectors,” Paul-Dieter Cirlanaru, CEO of CITR, said.   “The main difficulties of companies will be caused by low capitalization, because of limited resources of shareholders, the absence of an adequate legal framework, and the absence of a pro-business approach of the regulatory authority regarding equity financial brokering. Consequently, these will be affected by two deficiencies – the absence of own development resources and the impossibility of accessing banking funding, because of high indebtedness. An option may be channeling the available financial resources (e.g., from pension funds) towards areas with high demand and profitability, such as Romanian industrial companies,” Paul-Dieter Cirlanaru, CEO of CITR, concluded.   Arrangement with creditors, an increasingly popular solution for companies in difficulty   In the first half of the year, there were 71 applications for initiating proceedings of arrangements with creditors, out of which 33 are in progress. 19 of these are high-impact companies, five more than in the entire year 2023.   The cumulated turnover of the companies which used arrangements with creditors is EUR 408,729,900, and their non-current assets are worth EUR 118,765,815. Moreover, their total number of employees is 4,481.   The first five counties in the country by number of proceedings of arrangement with creditors are: Bucharest and Dolj with 8 proceedings, Cluj and Mures with 5 proceedings and Ilfov with 3 proceedings.