The Surgeon

The Surgeon

Andrei Cionca, founding associate at Casa de Insolventa Transilvania, talks about the tough decisions a company has to take if unable to repay its debts.


Q: What is the success rate of an insolvency process in Romania? 
Andrei Cionca: It’s around 6%, which a low rate compared to other countries, where the number is around 30%. It’s because Romania lacks an education regarding insolvency. When a company fails to pay its debts, the law says it should start the insolvency procedures. In Romania firms not only avoid doing that, but they push the situation to the limit. 
The sooner a company starts the insolvency process, the more chances it has to restructure and recover its business. When a manager begins to postpone paying his debts, this is a clear sign the firm has a liquidity problem.
Every insolvency process is unique. There is no manual to follow. You need to understand that business well, to see its resources and drawbacks. It is management of a crisis situation. On one hand, you need to restructure the company’s operational processes. This requires crisis management talent because you work with demotivated and unpaid employees, with unhappy suppliers, with banks that lost their trust in the business, and with state budgets that lack solutions and are reluctant to any compromise. 
On the other hand, you have to restructure the company’s debt, because most of the time it is over indebted. Therefore, in parallel, you need to negotiate with the creditors, to convince them of the firm’s operational performance and to reduce its debt to a sustainable level. 
Q: How important is the banks’ role in increasing the number of insolvency processes, considering the percentage of bad loans has reached 17%?
Andrei Cionca: Banks are the major creditors in most cases. They have a reporting system that differs from the real world. They have to respect some provisioning norms. For a bank, a recognized provision is a cost that reduces its profit. If a company enters insolvency, it obliges the bank to make provisions. That why, when a company failed to pay its debts, banks found different tricks such as technical postponements or rescheduling of the debts. These tricks allowed them to avoid making provisions. 
Banks preferred to avoid taking tougher decisions regarding such companies, even though, in this end, it led to the death of these businesses. I have dozens of examples in which they haven’t received one cent from companies for more than two years, and yet they haven’t taken any measures against them.
The financing institutions have recently started to change their approach, mostly due to the Central Bank’s tighter regulations. They are now better controlled when trying to hide such problems. They were forced to start recognizing these issues and include them as costs, which has led to the deterioration of their key indicators. 
Budgetary creditors also play an important role, as they approach insolvency with totally unrealistically expectations. If we propose them a certain reorganization plan for a company and to recover a percentage lower than 100% of their debt, but much higher than they would have recovered in case of bankruptcy, they prefer bankruptcy.
Q: Give us details on how you act when a company starts the insolvency procedures.
Andrei Cionca: There are many companies that could have been saved if they had entered the insolvency procedures. But they started the process only when it was too late and they completely lacked the resources that could have saved them.
This is the case of construction company Romstrade, where salaries haven’t been paid since June last year. The firm has court-related problems, which means that its 1,200 employees cannot receive the necessary documents to prove they are unemployed. We have to manage this situation. We need to identify all the resources the company can benefit from. 
We’ve been active with the company since December 10, 2012. One of our first measures was to fire the management because we understood quickly that the management had absolutely no responsibility with the firm. The company had a one-man-show boss, who managed all its financial resources. The rest of project managers had only operational tasks and didn’t have their own budgets to manage. For example, I visited the project manager for the Arad-Nadlac highway. He was asking for resources to the headquarters and had no control over suppliers or payments to be made. Last summer, when there were 40 degrees Celsius outside, he had problems receiving even plain water for his workers. 
At the beginning I used to stay 12 hours per day at Romstrade. I understood exactly the situation of the company and I presented it to its creditors. We even decided to support this company with our own money, to help it pay the salaries of those employees who were in charge with key business sectors. We’ve been forced to do this because people cannot be motivated unless they are paid. The company itself literally had no resources. We reduced the number of its employees to around 40 and we created teams that were allotted certain projects. But the people were completely demotivated because of the overall situation. 
We are now analyzing the contracts this company has, but every day we have negative surprises and we discover more and more problems with these contracts. 
Q: Is Romstrade a representative case of a company that enters insolvency in Romania?
Andrei Cionca: Yes, the Romstrade case is representative for Romania. It’s about a manager who was in charge with all the resources of six or seven companies included in the group. These companies had operations in aviation, investments, infrastructure and constructions. It’s a clear case of management flaw. 
Unfortunately, Romanian companies live the entrepreneur-manager story. At the beginning, the experience and involvement of this manager is positive, because it helps it develop. But when the company grows to a certain level, the manager is completely overwhelmed, stops the growth for the firm and, in the end, kills it. 
This is an education deficiency. I think the biggest problem of the Romanian economy is not lack of financing, but poor management. One of the state’s priorities should be to create several internal schools that would form a management elite, to take over the most important private or state-owned companies in the country.
I’ll give you the example of Flanco, who had an international manager when we went there for the insolvency procedures. The company was listed on the stock exchange and had a very good image. The secret was that its manager came to Flanco on Tuesday morning, with the 11 am flight, and went back home on Thursday, with the 5 pm flight. What results can you ask from a manager who works from Tuesday to Thursday? Of course, we fired him the following week after we entered the company. 
Q: Should state-owned companies be reorganized through insolvency? Do you think the state has opened a “Pandora ’s box” by starting insolvency procedures at Hidrolectrica and Oltchim?
Andrei Cionca: No. I think insolvency is absolutely necessary and it’s the only solution to restructure and, eventually, privatize these companies. I have clear examples of large, private companies, faced with major difficulties, which managed to restructure and increase their businesses through insolvency. Why shouldn’t the state take advantage of these procedures?
The most important drawback in case of a state-owned company is that the decision to enter insolvency is at a political level. For politicians, electoral reasons are more valuable than financial ones. Once the company enters insolvency, there is absolutely no difference between a state-owned firm and a private one.
Almost all companies included in the state portfolio should start these procedures. Just take a look at their economic indicators. They are already in an obvious insolvency situation. My question is why the state has decided to act so late and why for so few companies.  
My proposal to the Economy Ministry is to make an experiment with a package of 20 companies, to see how much the state budget receives from them in their current situation and how much it could obtain within one year after they enter the insolvency process. I can guarantee that the results will be very good. 
One example is Leonardo, which entered insolvency with EUR 100mn unsustainable debt. Two years later, it received a diploma from the Oradea town hall as the best tax payer to the local budget. 
Q: You have previously said that Romania lacks investment funds interested to take over companies involved in insolvency processes. Do you feel funds’ interest has increased in this direction?
Andrei Cionca: No. I’ve been trying to create such a fund for one year. I’ve discussed with US and British investors. They admit this is an opportunity, but they don’t trust the Romanian institutions and they are afraid that Romania cannot reach a critical mass of interesting projects. 
When I asked for EUR 10mn to start with, I was told such an amount doesn’t justify the costs it involves. They wanted to invest EUR 100mn, but I had to admit it is difficult to find sufficient projects for this money. So the idea is on hold.
Q: Do you expect to see more hostile takeovers, as it was the case of Prodlacta Brasov, which was taken over by an investor from the Republic of Moldova?
Andrei Cionca: Yes. It’s an instrument those who want to save a company have to use at a certain point. The hostile takeovers in Romania are not as hostile as abroad. 
We have in our portfolio a company that needs to be sold urgently. All signs indicate it will go bankrupt in the second part of the year. But we cannot sell it because of the strong opposition of the minority shareholders and of the management team. It’s a large, well-known company in Romania, which will die. It currently produces losses and we are convinced that, because of the seasonality of the business, in autumn-winter it will be unable to generate cash. 

Q: Considering that 28,000 companies entered insolvency procedures in Romania in 2012, compared to 5,000-6,000 in 2005-2006, how do you see the development of this trend in the coming years? 
Andrei Cionca: I expect to see fewer insolvency processes from now on, but for larger companies. 
We currently manage between 250 and 300 projects. I think this year the asset recovery market, which has been blocked since 2008, will pick up. Investors’ interest has started to increase and this year we have received some letters of intent. We estimate the value of the assets we manage exceeds EUR 500mn.