Sunday, 29 July 2012

Bankruptcy spate

Recall this post? Remember the economic slowdown in late 2008 and 2009? Remember how Poland has got off it lightly? How do you assess the resilience of the Polish economy to weather the current storm?

One of the indicators of an economy’s strength is the number companies filing for insolvency. If only this gauge was to be taken into account, the Polish economy should be hailed as much more ailing than in 2009, when despite lower GDP growth more companies managed to get by.

2012, if it does not bring the end of the world just before Christmas, will go down in a history as a year of most spectacular bankruptcies. The list grows impressive and I surmise this is not the end yet.

For starters, Advadis. The company has actually been under water since 2009 and its misery lasted quite long, before liquidation was declared by the court. It has not been delisted yet and at the present its shares trade at 0.04 – 0.05 PLN and are “the cheapest” on the whole Warsaw Stock Exchange’s main market. The risk associated with price changes is hence noteworthy. Although a change of price of one tick resulting in increase of 25% sounds alluring for a refined speculator, I keep away from such stocks, for sake of their low liquidity and intrinsic value no higher than zero.

In March Dolnośląskie Surowce Skalne, lead contractor of middle section of A2, which took over responsibility for the hapless section, filed for insolvency. In April the court declared its liquidation, which was later changed to bankruptcy arrangement. I have no hopes the firm will ever recover. The Silesian company dealing with rock extraction has not risen to the challenge of building a motorway in an unfavourable market environment and under adverse terms of contract with the state road-building agency.

The avalanche grew apace in June. In the first days of this month PBG and its subsidiaries, including the biggest – Hydrobudowa, in the face of inability to settle their liabilities, filed for insolvency, which was soon declared in the variant involving protection from creditors. Woes of the construction industry have many causes. First and foremost is the price war which sparked off in 2010 when tender for road construction before Euro 2012 were put out. The companies, suffering from shrinking portfolio of orders, resulting from the economic slowdown, competed so heavily that they offered very low margins and accepted lack of revaluation clauses (allowing for price negotiations if prices of raw materials and other costs rise) and delayed payment deadlines in contract between them and the state road-building agency. Heavy leverage and liquidity squeeze knocked the company down I recently skimmed through some files at work and found an analytical report from August 2011 with ‘buy’ recommendation for PBG and target price of 155 PLN. Now shares of the firm are trading at around 6 PLN.

The next construction company queuing for bankruptcy was Polimex Mostostal, another one stricken by over-leveraging, losses on state-paid contracts and growing balance of accounts receivable. In mid-July the company sent a letter to financing banks and bondholders in which offered to enter into a “standstill agreement”, under which creditors would hold back from claiming their money for four months. In fact it meant buying time to revive the company and admitting severity of financial hardship. The agreement has been reached and the future of Polimex remains an open issue, but if creditors allow it to reorganise I see a bright future before it.

Construction companies themselves are not the only victims of the crisis. The wave has wiped out several subcontractors, left many workers jobless, done out of money creditors, i.e. bank and holders of seemingly safe investment fund units.

2011 was a hard year for the fish industry. All companies from it listed on the stock exchange have not been doing well. The reason for troubles were high prices of fishes on international market that could not be passed onto customers. The trend reversed in late 2011, but one of the companies in the sector, Wilbo, did not resist the pressure and popped off in July.

Retail sector in Poland seemed resilient to economic slowdown, but 2012 saw one notable fatality in this industry. Delicatessen network, Bomi, filed for bankruptcy in late June. The Company had been mismanaged for years and incurred losses since 2010. I blame the flawed business model for the downfall. In Polish society in which where you shop does not reflect upon your social status, luxurious and expensive delicatessen have a narrow niche on the market. Bomi positioned itself as a posh shop for the better-off, many of who actually prefer to buy groceries in supermarkets and discounter shops. Bomi’s strategy proved a big failure and the company has eventually gone under. The chain will probably be taken over by one or more of the competitors.

Summer is the holiday season and a year without a bankruptcy of a travel agency could not be deemed memorable. Early July saw the spectacular downfall of Sky Club, legal successor of well-known Triada. Within hours the agency ceased to sell trips and send its customers for holidays. Most of eighteen thousand of tourists who holidayed with Sky Club had to return to Poland ahead of plan, those who have not set off yet, would not go at all. The liability of the tour operator was covered by an insurance guarantee of 25 million zlotys, sufficient merely to organise comeback to Poland for tourists stuck abroad. The afflicted clients, surprised by the bankruptcy before the departure, will be wrangling to claim their money for months. I do not dare to assess their chances to recover money. Needless to say several small travel agencies declared insolvency so far.

Bomi and Sky Club dragged down IDM brokerage firm. The once renowned company has not officially gone under water, but its troubles are apparent. It lost many of its own and its clients’ funds in stocks and bonds of the companies described above.

OLT Express enter the Polish market on 1 April 2012. By offering competitive prices for domestic flights (99 PLN) it beat competitors and soon gained many clients. Its lucky string has not lasted long. On Friday the operator officially suspended its operations, the cited reason is cutting off funding from lessors and key stakeholder, Amber Gold, a mysterious vehicle, black-listed by the Polish Financial Supervision, which offers high-yielding deposits, allegedly backed in gold, incidentally said to be a Ponzi scheme.

Who next? Hard to predict. Economic indicators, including faltering consumer confidence, point at lean times, so some more spectacular business failures might be witnessed this year.

1 comment:

Anonymous said...

Yo Bart!

Construction is a tough business walking a tightrope between riches and bankruptcy. Especially when most large companies are just a shell trying to take in XY and pay only Y to their hoards of sub contractors. The crunch has all but stopped major projects for many years now so I don't read much into those bankruptcies.

OLT - just plain rotten so no surprise there either.

Other travel companies - again should be no surprise. People are worried and saving money. This sector will be hit harder and harder as years go by not just by saving but also by transfer to DIY internet holidays as we do every year now. I really think the package tour days are nearing extinction.

Bomi - as you say bad business model badly executed. No shock. I can afford their stuff but even we (and friends) find the discount prices in Biedronka, Lidl and so forth worth going back to for 90% of our stuff and only seek out the few goodies elsewhere.

Retail generally might yet be hit harder judging by trends elsewhere but apart from that I don't see your examples as being harbingers of doom.