Restructuring, both from a financial and operational perspective, has been regarded as a wonderful “nice to have” by the Romanian market, for many years. Will this time be different?
In principle, everybody agrees that the Romanian business environment, and particularly Romanian entrepreneurial businesses, are in much need of corporate renewal and turnaround. There are very clear “symptoms” showing this need: chronic low profitability, increasing misalignment with the market, inefficient structuring of financing, and uninspired talent acquisition and retention.
On the side of Romanian-owned businesses, there are of course some notable exceptions that have even outperformed multinationals in markets naturally favoring the latter (Dedeman, a player in the DIY market, is probably the largest example). And there are state-owned enterprises performing surprisingly well and showing solid returns in the short run as well as promising results for years to come (a number of large energy companies qualify in this respect).
The General Picture for Romanian-owned Large and Mid-Sized Companies
For privately owned businesses, the owners are usually an aging population, who have reached a stage where diversifying the equity base, exits, and succession planning are options to be carefully considered, along with deep measures of corporate renewal to reverse stagnation and bring management into the modern age.
These entrepreneurs are basically the generation of “survivors,” who started in the early 90s after the Romanian revolution, made it to this day through rampant inflation (above 200% in the early 90s and staying above single digits for many years afterward, well into the 00s), strikes and riots, political instability, and two major economic crises (2008 and 2020), and are now facing yet another challenge, with high inflation, low growth, and a war at the borders that impacts political stability for the whole world.
For state-owned companies, there are many “dead” business models still out there in the market, causing the taxpayer to cover losses for politically kept-alive entities. The Romanian airline, the Romanian post office, and many others are simply outperformed in the market and maintained without any horizon, dragging tens of thousands of employees into a career without hope.
Generally, these businesses exhibit many obvious dysfunctions, such as overextending (“diversification” in markets with no competitive edge clearly defined), clear mismatches between short-term and long-term debt and assets, improper management of working capital, overextension of capital expenditures in unprofitable areas, improper monitoring and optimization of cash, failures to dislocate and walk away from non-core enterprises when business focus is needed, etc.
The last time Romania took a test on its ability to encourage corporate renewal as opposed to outright liquidating business (even where there was still potential in the model), it failed dramatically. It was approximately a decade ago (2012-2013), when banks faced their largest count of non-performing loans, with some of the largest banks well exceeding 20% NPLs in their loan book. While some timid attempts were made to restructure the loans, in the end, the banks sold most of the NPL portfolios (with proceeds from 6 to 16 cents on the dollar) and, predictably, a massive wave of bankruptcies ensued, with more than 95% of companies going from insolvency into bankruptcy and liquidation, flooding the market with marketable and less marketable assets.
A lot has changed since. New legislation, Directive 2019/1023 on preventive restructuring frameworks, has been implemented in Romania last year, a project I participated in. Professionals are more preoccupied with corporate renewal and turnaround. Banks are generally far more resilient and can have a broader range of choices when facing an underperforming borrower. Corporates are more aware of this important need to “face the music” and embrace change in order to survive. As the years of cheap overflowing liquidity have passed, and the costs of funding have exploded during last year – with all central banks going into restrictive policies very abruptly – companies are now being tested.
“This time is different” is jokingly referred to in the business world as one of the “famous last words” for investors, as history tends to repeat itself, and assuming otherwise is dangerous. Will it be different? We do see many more cases opening up for actual, out-of-court, proper restructuring, with key stakeholders in dialogue. Time will tell.
By Valentin Voinescu, Finance and Restructuring Partner, Nestor Nestor Diculescu Kingston Petersen