Over 100,000 companies became insolvent in the last 5 years. What is the impact?
Romania registered a total of 105,545 new insolvent companies 2011-2015, an annual average of about 20,000 insolvent companies. A very large volume, especially they represent about 16% of the total registered Romanian companies, and a quarter of all active companies (which register revenues). Not only the number of insolvent companies in the analysed period is very high, but also their size. Thus, 2,933 of insolvent companies in the analysed period registered over 1 M EUR turnover, given that the average of the active companies operating nationwide in this income segment was about 23,455. The business environment in Romania has lost in the past five years about 13% among companies with high incomes.
Comparing the figures to the regional level, or to more developed countries, we can see that insolvencies phenomenon has been negatively exploited, financially troubled companies abusing a frail and very protective legal framework with the debtor.
The average incidence of insolvencies per 1,000 Romanian active companies in 2011-2015, was 40 insolvent companies, nearly four times the level registered in Central and Eastern Europe, given that Romania has always been in the top three countries in the region in this regard. Moreover, the share of insolvent companies which have opened insolvency proceedings at the debtor's request increased from 30% in 2008 (pre-crisis financial level) to nearly 55% in 2015. Also, only 2% - 3% of Romanian insolvent companies successfully reorganized, almost ten times less than the average of developed countries from EU.
Starting 2014, the number of new insolvencies fell again, amid the coming into force the new code about open insolvency proceedings. Their number decreased by 28% in 2014, 50% in 2015; and Coface estimates for 2016 a 25% additional contraction. Unlike earlier years, in 2016 Coface noticed a decrease in newly opened insolvencies coupled with a reduction of the systemic risk.
The financial losses (debt exceeding the fixed assets) caused by companies that became insolvent in the first half of this year, fell by 56%, while social losses (number of jobs lost) decreased by 12%.
Also, the improvement of payment discipline in the current year becomes visible nationwide: the value of the rejected payment instruments in first half of this year decreased by almost 70% compared to the same period of the last year, from 5.7 B RON at 1.7 B RON, while the number of newly registered LLCs in the analysed period increased by 26% (the highest level after 2010).
The insolvencies’ impact in the economy in 2011 - 2015
However, the high level of insolvencies in last five years (2011 - 2015) has left deep traces in the national economy and business environment; the latter could be evaluated from different points of view:
- Capping the economic growth: according to European Commission estimates, Romania's potential GDP for 2011-2015 has registered an average of 3%, significantly below 5% level registered before the impact of the financial. The key factors that contributed to this contraction were the reduced foreign direct investment and the modest European funds absorption (essential elements to finance gross capital), low levels of productivity and birth rate in workforce trends (amid effect of emigration, increasingly visible in the population qualified). Romanian companies’ new insolvent in 2011 - 2015 generated 92.5 B RON total turnovers, 9% of the average turnover of all companies registered in Romania in the mentioned period of time. The very low companies’ productivity amid inefficient investment or unsustainable financing gross capital formation contributed negatively to value added registered nationally, so to the GDP.
In order to simulate the impact of insolvent companies on the GDP level, the number of Romanian newly insolvent companies decreased in 2011 - 2015 by 75% (equal to CEE average).
For those companies, an added level equal to those registered by the active companies was simulated. Coface internal calculations show an increase of about 75% of potential GDP for 2011 - 2015, from 3% to nearly 5.2%, simulating an increase in average productivity among insolvent companies, adjusting their numbers to an acceptable level (the average registered in ECE).
- Reducing the budget deficit by increasing tax revenues fuelled by more social contributions: insolvent companies in 2011-2015, registered 451,956 employees, 11% of all jobs in all active companies. Given that only 2% of insolvent companies successfully reorganized, we can say that most of these jobs were abolished. Moreover, given that the Romanian companies who interrupt their activity registered an average lifespan of 11 years, and they are twice more than newly registered companies, it is hard to believe that newly established companies can absorb an important part of more than 450,000 employees who lost their jobs due to employer insolvency.
Considering that the unemployment rate reported by the INS for Romania in 2011-2015 was relatively stable, it means that some of these employees were hired from other companies, but most likely emigrated abroad searching for work. The total of the tax revenues generated by payroll taxes and social contributions for 2015 was 26.6 B RON, the financial statements of newly insolvent companies in 2011 - 2015 indicate a negative impact on income tax about 3 B RON, which represents approximately 29% of the total deficit registered in 2015, namely 10.3 B RON.
- The losses incurred to the creditors: the financial statements of the newly insolvent companies in 2011 - 2015 indicate that overall accumulated debt balance of 127.5 B RON, 15% of all related debts of Romanian companies. From all creditors of insolvent companies, suppliers have registered the biggest losses, given that those concentrate 47% of the total debt, 60 B RON. In this ranking, the next lost creditors are credit institutions (banks, non-banking financial institutions, leasing companies), 36 B RON debt reported in the insolvent companies balance sheet, or 28% of total debt, followed by the state authorities with 26 B RON and 20% share in total liabilities of insolvent companies. Only 6 B RON, i.e. 5% of total debt, were attracted by insolvent companies from affiliated entities.
Is not an accident, the suppliers have registered the biggest losses because the newly insolvent companies in 2011 - 2015. Amid bank financing conditions increasingly more demanding since 2009, private companies have been forced to turn increasingly more to the credit provider. The risk of default has been boosted in 2008-2013 because:
- The phenomenon was generalized, many companies promoting the same behaviour in the same period;
- The phenomenon was amplified on the trade chain, as requests for extension of deadlines for payment / collection advancing in the supplier chain. The average term of collection receivables registered by Romanian companies increased from 60 days in 2008 to 104 days in 2015;
- This phenomenon created a growing interdependence between companies, increasingly more companies signalling temporary inability to pay amid not collecting debts from major customers;
The period of the income from revenues transformation, increased, while the pressure of delivering spending’s into payments also increased, amplifying the pressure on companies’ liquidity.
In this context, large and very large companies have progressively played a role in increasingly significant “commercial banks” for their customers, preferring to accept extended receipt terms. SMEs have transferred in the post-crisis a significant part of bank credit to the commercial (credit provider). This is likely to intensify relations between private companies, which started to have a significant financial shape, not just one with commercial a character.
“In the last five years, specifically during 2011 - 2015, we observed an abuse of Romanian companies in exploiting a legal shaky framework,fructifying the gaps of insolvency proceedings very protective for the debtor. In the past five years, Romania registered more than 100,000 corporate insolvencies, with an incidence of 1,000 active companies, four times above the average in Central and Eastern Europe, and a percentage of successful reorganization of maximum 3%, the latter being ten times bellow than the average in developed countries of the EU. The very high number and high size of insolvent companies have capped the growth to an average of 3% compared to 5.25% if the Romanian insolvencies phenomenon was aligned with the average of the region.
About a third of the budget deficit could be financed by tax revenue losses, and lenders in the economy registered record losses of 127 B RON, the biggest loss being private providers, accounting for 47% of the total debt reported by companies insolvent.
Given the major impact generated in the economy, Coface will analyse in the next period 100 largest companies newly insolvent in the past five years to better understand the common mistakes thereof and shareholding structure in terms of country of origin and affiliates”, stated Iancu Guda, Services Director Coface Romania.
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