Financial losses due to insolvencies reached a historic high, Coface shows

The losses of Romanian companies caused by insolvency reached a maximum historical level, although 2017 started with a record low level of insolvencies, a recent Coface study reveals.

From the quoted analysis, conducted based on the data supplied by the Insolvency Proceedings Bulletin (BPI), in the first quarter of the current year 1,753 new insolvency proceedings were opened, down by approximately 22 percent against the same period of last year, when 2,237 insolvencies were opened.

“Despite this, the financial losses caused in the business environment (estimated by the level of debts registered by insolvent companies exceeding the cumulative value of the fixed assets) have reached historical highs,” the report reads.

This dynamic is caused by the insolvency of some very large companies that are concentrated mainly in sectors such as power production and supply and constructions (where the financial dimension prevails) or the manufacture of textile products (where the social dimension matters most), according to Coface data.

“Approximately 16 percent of companies operating in this sector become insolvent each year, and about 90 percent of them failed in maximum two years. Although this sector only generates 4.5 percent of insolvent companies nationwide, approximately 13 percent of the jobs lost because of this phenomenon come from this sector,” the study reveals.

At the same time, 2017 began rather badly for energy companies, Coface notes, they being taken by surprise by the increase in the price of electricity, which registered a boom in a very short time on the spot market, thus causing heavy losses to many energy traders.

The five largest insolvencies in this sector registered total liabilities of almost RON 900 million, while the level of fixed assets was only RON 150 million and equity only RON 100 million, Coface said.

“The constructions sector registered a historic low of residential building permits because of the disinvestments of private companies, on the back of very low profits and lack of confidence in the future. Uncertainty is amplified by the minimum level of the last ten years in terms of public investment spending from the state budget that dropped to only 2.5 percent of the GDP in 2016, compared to 4.5 percent in 2008,” Iancu Guda, Services Director, Coface Romania pointed out.

All these led the construction sector to register the highest rate of bad debts in the portfolio of bank loans (based on the calculations published by National Bank of Romania in September 2016). According to Coface’s own calculations, approximately 11 percent of Romanian companies are operating in this sector, and 80 percent of them report incomes below 100 K EUR / year 2015.

Amid persisting uncertainties in the economic environment, that were more pronounced for SMEs, companies had to face the greatest difficulties.

In this context, Coface has developed EasyLiner Plus adapted to Romanian market, which includes a monitoring service of business partners, that gives SMEs information on the quality of their customers in order to limit the risk of unpaid invoices. The new product also offers a collection of unpaid invoices and rapid indemnification in case of a claim.