Банкеръ Weekly

Briefs

A GLEAM IN THE TUNNEL OF INTERCOMPANY LIABILITIES

As of January 1, 2007 liabilities of enterprises from the Bulgarian economy's non-finance sector have been rising at its habitually high and stable rate, the sixth annual research on intercompany indebtedness, carried out by the Bulgarian Industrial Association (BIA), showed. It's alarming that the turnovers in our economy are not so big in order to cover that indebtedness.
If we consider its average annual growth rate so far (about 20%), the liabilities of enterprises from the non-finance sector might have reached BGN97-98BN in end-2007, BIA's Chairman Bozhidar Danev conjectured. According to official data, that indicator was BGN81BN a year earlier. The real amount of debts, however, could turn out smaller. Statistical data show that the share of liabilities to connected enterprises goes down by 1.5%, i.e. the hidden release of loans between enterprises which have reciprocal liabilities and receivables decreases.
After the tremendous growth of indebtedness between connected enterprises in 2005, the upward trend (as an absolute figure) slowed down, BIA research found. In the end of 2006 it was reduced to 18.5%, down from 20% a year earlier. That should mean that the contract and financial discipline in holding groups improve. Companies are more and more careful to their finances and are making serious analyses on where and how much to invest. That has been necessitated also by the reduced possibilities for speculative profits.
Bulgaria's EU membership probably has a disciplinising effect, too. The requirements to the products' quality and the way of production necessitated the introduction of various systems for quality, intensification of personnel training, and more attention to each investment opportunity and business partners. The expectations are that the smoothing out of these internal financial relations will reflect as well on the relations with the other (outside) contractors and partners, аnd that will contribute to the optimal use of all available financial means. The more so that BIA's data show also a decrease in the share of tax liabilities (by 0.7%) and fo trade loans (by 0.3%), which is a positive sign in the companies' operation.
The structure of liabilities according to business activities is as follows: 27.5% (BGN22.3BN) of them are in trade, 11.1% (BGN9BN) - in the real estate sector, 10.4% (BGN98.4BN) - in construction, and 9.8% (BGN7.9BN) - in transport and communications. According to Bozhidar Danev, it could be claimed that debts in the real estate sector are even higher than the official ones as most of the deals are not declared with their real value. And the increase of liabilities in that sector and in construction, which is connected with it, could result in chain bankruptcies. In that respect is the forecast of Cofas Bulgaria, a consultancy. According to its research, for a consecutive year construction is among the riskiest branches in this country and will remain such in 2008 as well.
For the time being the enterprises from the manufacturing sector seem to be more upright in their financial relations and their liabilities are lower. The debts in the production of foodstuffs, drinks and tobacco products total BGN5.2BN, in the production and distribution of electricity, gas and water they amount to BGN5BN, and in metallurgy and production of metal articles - to BGN4BN.
At the same time there are still companies in this country that generate liabilities. The Kremikovtsi iron and steel works is such an example, accounting for 60% of the debts in the metallurgy sector.
The research of liabilities' structure in 2006 showed that intercompany indebtedness was the main part in it. In their total volume BGN56.5BN (69.8%) fall into that category, BGN21.4BN (26.4%) are net debts, and the remaining BGN3.1BN (3.8%) are tax liabilities.
BIA has also established that the ratio between short-term (up to 1 year) and long-term (over 1 year) liabilities changes as well. A positive trend is that the share of long-term debts in the aggregate volume of liabilities went up from 36.6% in 2005 to 38% in 2006. That is interpreted as a sign of better planning of operation on the part of companies and clearer plans for their future development. Moreover, they can afford higher investment activities and greater participation of banks and other financial institutions in their crediting. Investments are made in technological renovation, restructuring of enterprises as per the EU's requirements for certification of production, improvement of the terms of labour, satisfying the ecology standards, etc. As of the end of 2006 that money reached BGN30.8BN, or up 25.7%, and the investment activity of banks was redirected to the real (production) sector.
The 4.3-fold growth of liabilities under bond loans - from BGN306MN to BGN1.323BN within the analysed period should be noted as well. That is a comparatively new financial instrument for gathering fresh resource from the market, successfully used by Overgas Inc., Sopharma, Alen Mak, Enemona, Eurohold Bulgaria and others.
These measures are expected to result in an increase of the enterprises' proceeds in the long term, which on its part could positively influence the rising indebtedness and reduce it.
The changes in the way of thinking of Bulgarian business was also reflected in the results of BIA's annual poll called 2007 through the eyes of business. It found that the bulk of investments last year were directed to the replacement of machines and equipment (42%), followed by investments in buildings (26%), and management systems of the ISO, OHSAS and HACCP series (22%). Industrial property (trade marks, patents, industrial design) attracted the smallest investments - only 11% of the inquired spent money on that in 2007. The ratio remains unchanged also regarding investment intentions for 2008: 40% of the polled intend to invest in machines and equipment, 26% - in buildings, 21% - in management systems, and only 13% - in industrial property.
Problems on which investment intentions focus are distributed as follows: 39% of the inquired point to the improvement of energy efficiency of production, 29% - to ecological requirements, 22% - to ensuring healthful and safety labour conditions, and another 10% - to the sanitary and hygienic requirements.
In order to overcome these problems business will also rely on financing from various European funds: 58% of entrepreneurs flatly state their readiness to apply by their own projects, and another 24% are still hesitating. Only 13% of the polled do not have such intentions and 5% claim they do not have the necessary resource (human as well).
High indebtedness in itself does not lead to immediate risks as its increase is only natural in the process of economic growth. But there will always be companies that will play tricks and delay paying off their debts. A danger appears when liabilities are to honoured at all and are accrued throughout the years into the accounts of enterprises which are in fact bankrupt, but have not been declared insolvent due to the clumsy legal procedures.

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