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Economic analysis of insolvencies and preventive concordats in Romania in the first half of 2024

insolventa - Moldova Invest

Bucharest

Economic analysis of insolvencies and preventive concordats in Romania in the first half of 2024

In the current economic context, characterized by uncertainties and various challenges, Romania recorded a significant number of insolvencies and preventive concordat requests in the first half of 2024. According to data published by CITR, the leader in the insolvency and restructuring market in Romania, over 3,600 companies entered insolvency, including 72 impact companies with assets exceeding 1 million euros.

This increase is considerable compared to the same period last year, when only 33 impact companies entered insolvency. In this analysis, we will explore in detail the causes of this increase, the most affected economic sectors, the geographical distribution of insolvencies, and the economic outlook for the coming period.

The alarming rise in insolvencies

During the analyzed period, the total number of insolvencies increased to over 3,600, up from 3,401 recorded in the first half of 2023.

The increase in the number of impact companies entering insolvency, from 33 to 72, reflects a significant deterioration in the business environment for large firms.

This situation is not only a wake-up call for the national economy but also an invitation to a deep analysis of the causes that led to this significant increase in insolvencies.

Detailed analysis of insolvency causes

It is important to understand that these impact companies have a major contribution to our economy, and to help them, we must understand the causes for which they have encountered difficulties and ensure that both the mechanisms and the mentality with which we approach them are appropriate. The CITR team has identified five main factors that contributed to the decline of impact companies, starting with liquidity problems and rising operational costs that led to increased debts, declining demand and sales, as well as unprofitable management decisions,” declares Paul-Dieter Cîrlănaru, CEO CITR.

  1. Liquidity problems:Liquidity problems were identified as one of the main factors that led many companies into insolvency. Inefficient cash flow management particularly affected small and medium enterprises, which faced difficulties in covering short-term financial obligations. This led to a vicious cycle where companies failed to pay their suppliers on time, further affecting their ability to generate sufficient revenue to sustain operations.
  2. Rising operational costs:The significant increase in raw material and energy costs had a devastating impact on companies’ profit margins. In the production and construction sectors, where operational costs are already high, any additional increase can quickly lead to insolvency. This situation was aggravated by rising international energy prices and supply chain disruptions, which led to delays and additional costs.
  3. Accumulated debts:The accumulation of long-term debts and the inability to restructure them effectively represent another major factor that contributed to companies’ insolvency. Many companies failed to renegotiate payment terms or secure additional financing to support their activity. In the absence of easy access to credit and supportive policies from financial institutions, many companies ended up in a financially overburdened situation.
  4. Declining sales and demand:The decline in domestic and international market demand led to a significant reduction in revenues for some companies, especially in the trade sector. This was exacerbated by inflation and general economic uncertainty, which made consumers more cautious with spending. The reduction in purchasing power and changes in consumer behavior negatively affected companies’ revenues, forcing many businesses to declare insolvency.
  5. Unprofitable management decisions:Inadequate management decisions and the lack of a robust business plan were also factors that contributed to some companies’ insolvency. The lack of a clear crisis management strategy and risk prevention was evident in many cases analyzed. Hasty or poorly informed decisions, such as aggressive expansions without adequate market analysis or investments in unsustainable projects, had serious consequences on companies’ financial stability.
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Preventive concordat, an increasingly popular solution

The preventive concordat has become an increasingly popular solution for companies in difficulty, offering a way to restructure debts and avoid insolvency.

In the first half of 2024, there were 71 requests to open preventive concordat proceedings, of which 33 are ongoing, and 19 come from impact companies. This number is already higher than the total requests for the entire year 2023.

The cumulative turnover of companies that have resorted to the preventive concordat is approximately 409 million euros, and their fixed assets amount to 119 million euros. The total number of employees in these companies is 4,481, highlighting the importance of these firms for the national economy.

Most affected economic sectors

CITR conducted a detailed analysis of the most affected economic sectors by insolvencies in the first six months of 2024. This analysis provides an insight into the specific challenges of each sector and emphasizes the need for appropriate restructuring strategies.

  1. Wholesale and retail trade:Representing 26% of total insolvencies, the trade sector has been severely affected by changes in consumer behavior, influenced by inflation and rising living costs. The reduction in purchasing power led to a decrease in sales and, consequently, revenues, forcing many businesses to declare insolvency.
  2. Construction:With 20% of total insolvencies, the construction sector faced significant increases in material prices and difficulties in accessing financing. Economic uncertainties and delays in infrastructure projects also contributed to the instability of this sector. The rise in construction material prices and the lack of adequate financing sources put immense pressure on companies in this sector.
  3. Manufacturing industry:Representing 12% of total insolvencies, companies in this industry were affected by supply chain issues and rising production costs. Additionally, rapid technological changes and the need for adaptation placed extra pressure on companies in this sector. Adapting to new technologies and market requirements was difficult for many firms, contributing to the increase in insolvencies.
  4. Transport and storage:10% of total insolvencies were recorded in the transport and storage sector, which felt the effects of rising fuel prices and the global logistical situation. The decrease in transport volumes and the increase in operational costs contributed to the rise in insolvencies in this sector.
  5. Hotels and restaurants:This sector represented 7% of total insolvencies, being affected by post-pandemic economic uncertainties and changes in consumer behavior. Rising operating costs and the lack of qualified staff were determining factors in the advance of insolvencies in this sector. The hospitality industry continues to face significant challenges, including seasonal fluctuations and changes in consumer preferences.
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Geographical distribution of insolvencies

The most affected regions in terms of the number of insolvencies were:

  • Bucharest: 574 companies
  • Bihor: 257 companies
  • Cluj: 215 companies

This geographical distribution highlights that areas with intense economic activity are the most affected by insolvencies. Bucharest, as the economic center of the country, records the highest number of companies in difficulty, followed by Bihor and Cluj counties, which also have a significant number of affected businesses.

Economic outlook

Paul-Dieter Cîrlănaru, CEO CITR, anticipates a positive macroeconomic evolution for the next 6-12 months, with an estimated economic growth of over 3%, a declining inflation rate, and exchange rate stability. However, the main difficulties for companies will stem from low capitalization and lack of access to bank financing due to high indebtedness. Channeling available financial resources to areas with demand and high returns, such as Romanian industrial companies, could provide a solution to support them.

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The macroeconomic evolution will be good in the next 6-12 months; we expect reasonable economic growth, north of 3%, a continuously decreasing inflation rate towards the target range of the National Bank of Romania, decreasing interest rates, and exchange rate stability amid continued inflows of European funds and foreign investments. Thus, we do not expect systemic events, such as recessions or crises, neither at the general level nor in most economic sectors,” said Paul-Dieter Cîrlănaru, CEO CITR.

The main difficulties of companies will be due to low capitalization, as a result of shareholders’ limited resources, the lack of an adequate legal framework, and a pro-business approach from the regulatory authority regarding equity financial intermediation. Therefore, they will suffer a double deficiency – lack of own resources for development and inability to access bank financing due to high indebtedness. An option could be channeling available financial resources (e.g., from pension funds) to areas with demand and high returns, such as Romanian industrial companies,” concluded Paul-Dieter Cîrlănaru, CEO CITR.

Success factors for the future

  • Access to financing: Facilitating access to loans and external financing is essential for stabilizing companies in difficulty. Banks and financial institutions must adopt more flexible policies and collaborate with the government to support enterprises.
  • Debt restructuring: Implementing effective debt restructuring programs can help companies stabilize their financial situation and avoid insolvency. These programs should include renegotiation of payment terms and reduction of the debt burden.
  • Investments in technology and innovation: Companies must invest in new and innovative technologies to adapt to rapid market changes. This includes digitizing processes and adopting advanced technological solutions to improve operational efficiency.
  • Crisis plans: Developing solid crisis plans and risk management strategies can help companies be better prepared for potential economic disruptions. These plans should include cost reduction measures and resource optimization.

Conclusion

The increase in the number of insolvencies and preventive concordat requests in the first half of 2024 highlights the significant challenges faced by Romanian companies. Economic and management factors played a crucial role in the deterioration of many firms’ financial situations, and adopting effective restructuring strategies will be essential for stabilizing and recovering them. Although macroeconomic prospects are positive, with anticipated economic growth and decreasing inflation, companies must adapt quickly and adopt proactive measures to ensure their long-term viability.


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