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Increase in Insolvency Cases in Romania
CITR, the leading firm in insolvency and restructuring services in Romania, has reported a significant rise in the number of companies entering insolvency procedures during the first half of the year, exceeding 3,600 compared to 3,401 in the same period of 2023. Out of these, 72 are considered impactful companies with assets exceeding 1 million euros, a notable increase from just 33 in the previous year.
Preventive Concordat Restructuring Requests
Regarding restructuring efforts through preventive concordats, 71 applications were recorded in the first half of the year, with 33 currently in progress. Among these requests, 19 originate from impactful companies.
Understanding the Challenges Faced by Impactful Companies
According to Paul-Dieter Cîrlănaru, CEO of CITR, “It is crucial to recognize that these impactful companies play a significant role in our economy. To assist them effectively, we must understand the underlying causes of their difficulties and ensure that both the mechanisms and the mindset we employ are appropriate. Our team has identified five primary factors contributing to the decline of impactful companies, including liquidity issues and rising operational costs that have led to increased debt, reduced demand, and unprofitable management decisions.”
Key Reasons for Insolvency in the First Half of the Year
The conclusions drawn below stem from an analysis of the financial and operational challenges faced by companies with assets over 1 million euros across various sectors of the Romanian economy:
Liquidity Issues
The majority of companies entered insolvency due to liquidity problems. Small and medium-sized enterprises, in particular, struggled with cash flow management, finding it challenging to meet short-term financial obligations.
Rising Operational Costs
The increase in costs for raw materials and energy has significantly impacted profit margins, leading to companies’ inability to pay their creditors. The manufacturing and construction sectors were the most affected.
Accumulated Debt
The accumulation of long-term debt and the inability to restructure it effectively emerged as another major factor. Many companies failed to renegotiate payment terms or secure additional financing to support their operations.
Decline in Sales and Demand
A decrease in both domestic and international demand has resulted in a substantial drop in revenue for certain companies, particularly in the retail sector. This situation has been exacerbated by inflation and overall economic uncertainty.
Poor Management Decisions
Inadequate management decisions and the lack of a robust business plan also contributed to the insolvency of several companies. The absence of a clear crisis management strategy and risk mitigation plans was evident in many of the analyzed cases.
Future Outlook
In the coming months, we are likely to see further developments in the insolvency landscape as companies navigate these ongoing challenges.
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Continuous Growth in Restructuring Measures Amid Economic Recovery
The ongoing increase in restructuring measures is a reflection of the return to pre-pandemic economic and regulatory conditions. Timely access to restructuring facilities can be the critical factor that distinguishes successful processes from those that, unfortunately, are initiated too late,” concluded Paul-Dieter Cîrlănaru, CEO of CITR.
Business Sectors Most Affected in January to June 2024
CITR conducted a sectoral analysis of all companies that entered insolvency in the first half of this year, providing insights into the challenges faced by each industry and supporting companies in developing appropriate restructuring strategies.
Wholesale and Retail Trade
This sector accounted for 26% of total insolvencies, significantly impacted by shifts in consumer behavior due to inflation and rising living costs. The reduction in purchasing power led to decreased sales and, consequently, falling revenues, forcing many businesses to declare insolvency.
Construction
Representing 20% of total insolvencies, the construction sector faced substantial increases in material prices and challenges in securing financing. Economic uncertainties and delays in infrastructure projects have also contributed to the instability in this field.
Manufacturing Industry
With 12% of total insolvencies, companies in this industry struggled with supply chain issues and rising production costs. Furthermore, rapid technological changes and the need for adaptation exerted additional pressure on businesses in this sector.
Transport and Storage
The transport and storage sector accounted for 10% of insolvencies, impacted by rising fuel prices and global logistical challenges. A decline in transportation volume coupled with increased operational costs has led to a surge in insolvency rates.
Hospitality Sector
Comprising 7% of total insolvencies, the hospitality industry continues to be affected by economic uncertainties and shifts in post-pandemic consumer behavior. Rising operational costs and a shortage of skilled personnel have been significant factors driving the increase in insolvencies within this sector.
Regions with Highest Insolvency Rates
The regions that recorded the highest number of insolvencies include Bucharest with approximately 574 companies, Bihor with about 257 companies, and Cluj with around 215 companies.
Economic Outlook for the Next Six Months
“The macroeconomic outlook appears positive for the next 6-12 months. We anticipate reasonable economic growth, exceeding 3%, with a continuous decline in inflation towards the target range set by the National Bank, decreasing interest rates, and currency stability due to ongoing inflows of European funds and foreign investments. Therefore, we do not expect systemic events such as recessions or crises, either at a general level or within most economic sectors,” stated Paul Dieter Cîrlănaru, CEO of CITR.
“The primary challenges for companies will stem from low capitalization due to shareholders’ limited resources, a lack of adequate legal frameworks, and insufficient support,” he added.
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Pro-Business Approaches by Regulatory Authorities in Financial Equity Intermediation
Regulatory bodies are increasingly adopting pro-business strategies concerning equity financial intermediation. This shift is essential as many companies are grappling with a dual setback: a lack of self-generated resources for growth and the inability to secure bank financing due to high levels of indebtedness. One potential solution could involve redirecting available financial resources, such as those from pension funds, towards sectors that exhibit strong demand and high returns, particularly focusing on Romanian industrial firms,” concluded Paul-Dieter Cîrlănaru, CEO of CITR.
Preventive Concordat: A Growing Solution for Struggling Companies
In the first half of the year, there were 71 requests for initiating preventive concordat procedures, with 33 currently in progress. Out of these, 19 are recognized as impactful companies, marking an increase of five compared to the entire year of 2023. The combined turnover of the companies that have sought preventive concordat amounts to €408,729,900, with their fixed assets reaching €118,765,815. Furthermore, the total workforce of these companies stands at 4,481 employees.
The top five counties in the country with the highest number of preventive concordat procedures are: Bucharest and Dolj, each with 8 procedures; Cluj and Mureș, with 5 procedures; and Ilfov, with 3 procedures.
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