”Both insolvency rates and pressure to restructure have been held in check so far, in general, by government and regulatory intervention through measures such as tax deferrals, guarantees for loans and furlough. However, these measures are implemented for a definite period and, they cease, insolvency numbers are expected to grow,” stated Dinu Bumbacea, Partner and Advisory Leader at PwC Romania.
Bumbacea added that, to have better chance of surviving, companies must consider strategies of reconfiguring their plans and operations before government withdraw their support. ”Some companies have already set off restructuring plans, even since the last quarter of 2020, and this activity is expected to intensify in the first quarter of 2021”.
“Despite the extension of government labour subsidies until March 2021, we expect that the level of restructuring and insolvency activity will increase in the remainder of 2020 and into the first half of 2021. It is clear that companies that were already facing financial difficulties at the beginning of 2020, along with those in fast-changing sectors such as retail, travel and tourism and manufacturing, are likely to face challenging market conditions. This underlines the importance of restructuring businesses for long-term viability as well as near-term survival. In general, insolvencies are expected to increase in Q4 2020 and into 2021, especially for those companies that operate in heavily COVID-19-affected industries that may take much longer to recover (e.g. leisure, travel, hospitality, tourism, accommodation, retail etc), as well as for those that have yet to adapt their operations to the new environment,” the survey shows.
“As revenues dried up and cash calls became harder and harder to meet, government intervention has provided a vital lifeline for many businesses, even ones that had previously been strong and well-resourced. Support includes loan guarantees and wage subsidies for workers put on short time or furlough (more than 40 million workers are on furlough in the 37 economies we cover in this report). Governments have also offered tax holidays and moratoria on insolvency action. This support held down insolvency rates during the critical initial months of the crisis (Q2 2020 rates fell across many markets compared to Q2 2019). It would also appear to have eased the pressure to restructure and turn around troubled businesses, including those that were struggling before COVID-19. But governments can only afford to foot the bills for so long,” per the survey.
As government support is withdrawn, restructuring activity is expected to pick up. The immediate priorities will include repairing the balance sheet and dealing with the debts accumulated during lockdown. With revenues subdued and margins tight, there will also be pressure on businesses to eliminate waste, drive down costs and refocus resources on growth. Businesses have mainly focused on preserving liquidity by drawing on the government support structures, as well as cost reduction and stabilisation of supply chains