1 of 2 companies has a high insolvency risk, Coface report reveals

The local business environment has gone through a very painful regeneration process, in the last five years Romania lost at least 100,000 companies and 15 percent of companies with revenues over EUR 1 M, Coface report reads.

“Only the most powerful ones have survived, but most of them were affected by the turbulences of the last 6-8 years. Compared to 2008, Romanian companies currently have larger debts; they have negative working capital, commercial exposures twice as high and a much more fragile self-financing capacity. Following the application of shocks similar to those they faced in 2009, both in the financial and in the commercial channel, Romanian companies have much weaker immunity: practically, 1 in 3 companies will enter payment default, compared to the average of 20 percent registered in 2009. In this context, companies must remain more flexible, by outsourcing services/ functions which are not related to the basic activity. Thus, for an efficient credit risk management policy, it is no longer sufficient to know one’s client. One must get to know the situation of one’s most important clients”, Iancu Guda, Services Director Coface Romania, stated.

At the same time, 1 of 2 companies has a high insolvency risk, while 7 out of 10 companies pay their suppliers later compared to the average duration of collecting receivables and inventory turnover. Out of these, by this technique, 60 percent finance long-term investments, 30 percent reimburse contracted long-term banking credits (the balance of bank credit granted to companies decreases by approximately 5 percent year-to-year) and/ or pay dividends (under 5 percent low-tax advantageous fiscal conditions), while 10 percent finance group companies;

The balance of the supplier credit doubled from the impact of the financial crisis until the present, and increased from RON 168 billion (in 2007) to almost RON 340 billion (in 2016), while bank credit balance increased only by approximately RON 30 billion.

The average duration of collecting receivables increased from 60 days (in 2007) to almost 114 days (in 2015), and Coface estimates indicate a level of 118 days for 2016. Practically, the insolvency of a Romanian company in 2017 will generate financial losses twice as higher to its business partners.

The very high weight of companies with major insolvency risk is explained by the phenomenon of polarization of Romanian companies, which is much more serious than what Coface analysts notice in Hungary, Poland or the Czech Republic.

The balance sheet of Romanian companies becomes more and more unbalanced, given that the asset horizon is not aligned to that of liabilities, and working capital is negative. Practically, the level of short-term debts contracted by Romanian companies is higher by approximately 10 percent than that of circulating assets.