None of the five members of the board of directors of Hidroelectrica, four of which were appointed by the government based on political criteria and the fifth by Fondul Proprietatea, has any connection to the energy sector. However, they decided that Romania’s largest and cheapest energy producer had no other way out but to file for insolvency and reorganize, thus admitting to the government’s incapability to manage the strategic companies it still owns.
Vulpescu said the company’s situation worsened because of the drought that dragged its revenue down and pushed debt up, rendering Hidroelectrica unable to pay for the water it uses in the electricity generation process.
Hidroelectrica’s current state, however, is the result of ten years of ineffective management, political appointments to key positions in the executive management team and in the board of directors, loss-inducing direct contracts that made the “wise guys” (who have been buying electricity for less than the market price) rich, while the company lost EUR1.5 billion.
“It’s obvious that a company with EUR3 billion in assets that reports a EUR1 million profit, which isn’t even real, is a management disaster,” said Remus Vulpescu yesterday. He has been in charge of the company for a month.
The real reason behind Hidroelectrica’s insolvency might be the termination of the contracts with the ‘wise guys’, endorsed by the political decision-makers over the last ten years. However, the government is taking a really big risk with this solution because it will no longer have total control over the situation.
If the Bucharest Court rules in favor of the insolvency on Wednesday, the company will go to a court-appointed administrator, who might be lawyer Remus Borza, manager of the insolvency specialist Euro Insol. Hidroelectrica specifically requested him, sources on the legal services market say. Borza is a lawyer born in Baia Mare (north of the country) who graduated in the class of 1995 of the Bucharest Law School, the same as the current Prime Minister, Victor Ponta.
The court-appointed administrator will have to come up with a reorganization plan, which will be submitted to the creditors for approval. Vulpescu says the plan will not entail sale of assets, loan renegotiations or layoffs.
“We won’t be selling assets, we won’t be closing plants, we won’t shut down generators, we won’t shut down hydropower stations. We are not considering firing some of Hidroelectrica’s employees. We do not want to restructure the loan portfolio.”
If so, then why the need for insolvency, everybody wonders.
“If the petition for insolvency was filed at the advice of some lawyers who do not know the global implications of such a procedure and only want to try and take on the wise guys because the government is unable to get rid of loss-making contracts, then there might be a lot of collateral victims and the company might find itself with a flood of lawsuits on its hands from the partners it has done business with over the last few years,” says Doru Lionachescu, managing partner of boutique investment bank Capital Partners.
He added the lawsuits from these partners would “challenge the firm that audited the financial results for not having warned them about the financial situation of the company, as was the case with the insolvency of US’ Enron, which caused audit firm Arthur Andersen to leave the market.”
The news came as a shock to banks, which had lent Hidroelectrica about EUR500 million. Reluctant to grant loans as they have been until now, the insolvency of such an important company might make them freeze lending again or charge more for loans.
The insolvency of Hidroelectrica could seriously affect the perception of Romania among foreign investors, particularly because its floatation had been expected for this year. Foreign investment has been avoiding Romania over the last few years.
Fondul Proprietatea lost 5% on the stock market on Tuesday because Hidroelectrica’s insolvency would drive the value of assets down 20%.
On top of everything else is the negative signal this insolvency sends to the economy. If it is possible for Hidroelectrica to go insolvent, then who is next and who will be able to get out in the end?
(English version by Loredana Fratila-Cristescu)