Restructuring and bankruptcy take center stage under the new crisis rules

A bankruptcy or restructuring process in the US is not necessarily seen as a sign of failure, as it would be in Romania or elsewhere in Europe, although the recent chain of bankruptcies may have sent the sentiment of failure across all markets. Often, bankruptcy is just one step in a learning process. “Perhaps this will be the case for us in Romania as well, but for now bankruptcy in Europe is still viewed as a breakdown of trust between the parties to an economic relationship,” says Alexandru Barsan, partner with Peli Filip.
The number of companies coming to learn this the hard way is nearing 12,000 in December this year, which is more than double 2007's figure. This year has proven to be a tough one for companies in real estate, construction, retail, consultancy and distribution, many of whom have started insolvency procedures.
Western Europe expects a growing number of insolvencies, up to 200,000 next year, according to Euler Hermes, part of German group Allianz. The number of small insolvent firms will rise by a third in 2009, with countries like Spain, Ireland, Japan, the UK and the US the worst hit.
In Romania, the lack of liquidities, after delays in cashing in, a drop in companies' activity level or even the financial trouble their main business partners may be facing are some of the reasons which may lead to insolvency, says Andreea Deli, senior associate with Tuca, Zbarcea & Asociatii. The effects of the economic crisis are being increasingly felt in Romania, where the volume of non-performing loans has grown, and firms are facing difficulties in accessing financing, which has led to the so-called chain insolvencies, she says.
The sword is however hanging not only over the head of companies from certain sectors, but over all sectors of the economy. “If the financial crisis becomes an economic crisis, any sector could be affected and any company without liquidities could face insolvency,” says Ana Diculescu Sova, senior partner and coordinator of the litigation department at law firm NNDKP.

Companies' slow reaction to change triggers insolvency
The lack of financing is not the only cause of insolvencies in Romania. In many cases, companies end up facing bankruptcy because they have failed to respond to the changing business environment. “The company usually asks for the help of an insolvency specialist when it is too late,” says Arin Stanescu, partner with RVA Insolvency Specialists. Firms which accumulate debt and don't ask for help in time usually end up in this situation, he says.
Companies in difficulties should first re-think their business plans and the structure of their activity, adapting them to the new conditions, says Diana Deleanu of insolvency house Rovigo. “I think many of the main players on the market will need a reorganization plan very soon. If they don't act in time, we could see many of them going bankrupt,” says Deleanu.
Many of the companies in trouble were taken by surprise by the sudden and violent fall of the worldwide financial markets, for which they had no time to prepare, says Diculescu Sova. “The impossibility of predicting such a situation has triggered chain reactions with a foreseeable ending,” she adds.

Bankruptcies seen as last resort, but expected to happen
“Restructuring is diplomacy and bankruptcy is a declaration of war,” believes Barsan of Peli Filip, who favors diplomacy. Both the lawyers working on insolvency cases and the companies undergoing them would rather solve the problems by restructuring their business, and stay in the diplomacy area. Before the effects of the financial crisis reached Romania, less than two percent of insolvency cases ended in successful reorganizations. The low proportion was due to either a delay in declaring insolvency or just business partners' unwillingness to support a debtor in trouble, says Deli. “There may have been something else behind an insolvent debtor, such as the devaluation of assets or a business transfer to another business, which is debt-free,” Deli explains. But she believes the number of successful reorganizations will grow because the perception of insolvency will also change.
“There is no doubt that we are living in some of the most challenging times ever seen in the global financial markets. So far, Romania's economy has not been too badly affected by the world financial crisis. […] Companies need to look beyond quick fixes and start to think about the deeper structural changes they might need to make, so they are better placed to withstand a tougher economic environment,” said Serban Toader, senior partner of KPMG in Romania. “Businesses need to start asking themselves questions. Is my company's business model dependent on sectors under significant stress? What changes have I made to my strategy in the light of potential recession? What strategic options do I have? Am I looking for M&A targets, strategic alliances or disposals?” says Toader.
The purpose of the law governing insolvency cases in Romania is exactly to restructure the company in difficulty. Bankruptcy fails to satisfy both parties, and becomes a last resort, says Diculescu Sova. “Unfortunately the general economical situation will increase the number of bankruptcies,” she forecasts.
Insolvency is a last resort and is unquestionably useful, but there are other useful measures that can be taken before things reach that stage. “It is typically easier for a creditor to recover the money and obtain higher profits based on a negotiated restructuring of the financing and security packages, through the establishment of a new business plan and the restructuring of the debtor's activity rather than relying on insolvency,” says Alexandru Barsan.

Asset sales catch eye of vulture buyers
One of the main problems for insolvency houses and lawyers working on such cases is to sell the insolvent company's assets.
“The real estate market is blocked, so it will be hard to turn assets to account,” says Simona Milos, partner with law firm Stanescu Milos Dumitru & Associates. The liquidation value of an asset, lower than its market value, will be the main way to attract investors to such businesses, says Milos. In bankruptcy procedures, unlike in privatizations, the investor buys clean assets, without taking the company's debt on board, which makes liquidations even more attractive.
Distressed work-out will effectively redistribute assets to new operators. “Hopefully a greater number of institutional developers will enter the market. They have been largely unwilling to do so in recent years due to excessive land prices which simply did not make sense to them. Bucharest in particular is in desperate need of quality institutional projects,” says George Leslie, head of KPMG's recently created CEE real estate restructuring unit. “It's difficult to say when the volume of distressed situations will peak in Romania. I believe that, of the regional markets, Romania will prove more challenging than most. It has basically lost its ‘institutional investment grade status'. Many of the foreign banks will be seeking to reduce exposures significantly. This process could take more than a few years,” says Leslie.
Law firms rely on restructuring and insolvency to compensate for weaker areas
Insolvency may not be businesspeople's favorite word, but for law firms and companies specializing in this area it is a healthy sector which helps up their turnovers.
The litigation department within NNDKP, which includes insolvency cases, covers some 25 to 30 percent of the firm's annual turnover based on last year's figures, according to Ana Diculescu Sova. In its turn, Tuca Zbarcea si Asociatii hopes insolvency projects, run by a team of 20 lawyers, will bring the firm five to ten percent of its turnover next year.
“The market has changed and a significant proportion of our work now comes from situations arising from the crisis or the reaction to it,” says the Peli Filip partner. “We are looking at things rather realistically and we know that right now the demand for legal services has a higher focus on restructuring work,” he goes on.
But the firm is also looking forward to a few months from now when a large part of the work stream will be focused on mergers and acquisitions as a means to deal with the crisis, to consolidate and bring in new partners, Barsan concludes.
Law firms may now turn to insolvency projects and M&A activity to compensate for a drop in real estate related investment or development projects, but there are companies which focus exclusively on restructuring and insolvency. RVA Insolvency Specialists, which employs 50 people, expects a EUR 1 million turnover this year. “Considering that in the first part of next year we will turn account on important assets of companies we are working with, we expect a substantial increase in turnover,” says Arin Stanescu. The firm is working as a liquidator for Republica SA, Rulmentul, Navol Oltenita and Remedia, among others.
Rovigo, an insolvency house set up in 2000 by Vasile Deleanu, partner with Deleanu Vasile & Asociatii law firm, is active on the same market. With a team of ten people in its Bucharest and recently-opened Timisoara offices, the company has helped with the reorganization of Tofan Grup SA, among other firms.
Other insolvency houses in Romania include Transylvania Insolvency House, Moldova Insolvency House, Bucharest Insolvency House, Musat & Asociatii Insolvency House, Pro Insolv and BNP Consult.

By Corina Saceanu

Read more about

RetuRO opens its 5th counting and sorting center in Bacău County

read more