I get knocked down but I get up again?

The restructuring act became law in Poland in 2016. It gives businesses the opportunity to restructure to restore their profitability and mak necessary changes to their businesses. The act lays out four different approaches. The first option is a procedure for approving a mutual agreement, which is envisaged for companies with a small number of creditors. In this case, the debtor brings in a licensed restructuring advisor who then talks to the creditors, brokers a deal with them and applies to the courts for its approval. This system, however, does not provide the debtor with any protection and has, therefore, rarely been used. The second option – an accelerated arrangement process – is for parties who have no disputes or whose disputed debts are at a low level (up to 15 pct of the value of all liabilities). The next option is an arrangement procedure for those who have a high level of disputed debts, which is often the case with exporters (e.g. disputes over VAT). In both of these cases, the debtor does not relinquish management of the company and may continue to run the business while being overseen by a court appointed supervisor. The final approach – remediation – involves a manager being place in the company to manage its operations and who has the power to terminate agreements that would otherwise not be subject to early legal termination. For example: if a retail chain operates more than a dozen outlets and one of them is generating losses, then the solution to this problem could be to enter remediation with the final restructuring measures taken marking the termination of this contract because it should remedy the company’s finances. As soon as the restructuring begins, enforcement proceedings are brought to a close. A court supervisor can also apply to the court to reverse the decisions of a bailiff, which is usually necessary to restructure a company. Both insolvent and companies at risk of insolvency can undergo restructuring under the current law, therefore the latest statistics comprise not only the number of bankruptcies but also companies ton the verge of bankruptcy. Under the previous law it was only possible to apply for a settlement when a company was actually bankrupt. However, sometimes restructuring does not yield the expected results and a company will have to file for bankruptcy anyway. The Alma Market and Praktiker chains both suffered this fate.

Things will only get harder

According to Polish insurance company KUKE, a total of 1,081 bankruptcies and company restructurings were announced in 2018. KUKE predicts that in 2019 the total number of bankruptcies and restructurings should come to app. 1,200 businesses. “As a result of changes in the economy, we anticipate an 11 pct increase in bankruptcies and restructurings for 2019. The predicted weakening of Poland’s economic growth will have a direct impact on the financial position of many businesses. Looking at the international situation, Polish businesses will certainly be affected by the lower rate of growth across the eurozone, which will be particularly important for sectors that are focussed on exports, such as the automotive and furniture segments. The data from Germany – Poland’s main export partner – are extremely disturbing, as is the unpredictability of the prospect of Brexit. This year we should not be seeing a drastic deterioration in the economy. However, the weakening growth and the emergent risks for the market, both external and internal, will require Polish business people to take appropriate counter-measures,” cautions Tomasz Ślagórski, the deputy CEO of KUKE.

“As a result of changes in the economy, we anticipate an 11 pct increase in bankruptcies and restructurings for 2019,” says Tomasz Ślagórski, deputy CEO of KUKE

Retail chains in the spotlight

Bankruptcies and restructuring among retail chains have been increasingly entering the public consciousness, as we have seen with Próchnik, Matras, MarcPol, Alma Market, Praktiker, Piotr i Paweł, Małpka and Czerwona Torebka. According to a report by Coface, retail was just ahead of production as the sector with the highest number of bankruptcies in 2018. In 2018 the number of bankruptcies and restructurings in the retail sector came to 234 – 7 pct higher than in 2017. But what lies behind the financial problems of retail chains? “Internal demand is still strong. Nevertheless, this does not change the fact that there is still consolidation going on in the retail sector and this trend means that bankruptcies and restructurings are on the rise. It’s becoming increasingly difficult for smaller businesses to stay on the market. A significant number of companies can’t live with the competition from the stronger players. This situation could worsen when consumption declines,” predicts Marcin Siwa, the director of the risk assessment department at Coface. How would someone operating a retail chain in the rather specific elegant men’s fashion market assess the situation? “Having a wide retail network is a desirable business model for a consumer business. At the same time, it is very capital-intensive and carries special risks as it requires having many rented outlets. The important thing to remember is that most of the companies with this model have leased their outlets or logistics warehouses, so the main factors keeping the company afloat are the attractiveness of the brand, the skilful management of the working capital and the cost effectiveness. If this is all achieved, a chain can quickly grow organically; but when problems do arise and all the fixed assets you have are leased, you can go bankrupt in just a few months, because your creditors usually have little in the way of security,” explains Tomasz Ciąpała, the CEO of Lanĉerto, which currently operates 44 stores in shopping centres in 31 cities and towns across Poland. Other examples include the Ruch newsagent network, which was forced into an accelerated settlement process under which Alior Bank – one of the largest creditors – eventually took over the chain. Another notable case was that of Matras, which was once the second largest bookstore chain in Poland and had been undergoing a major expansion programme. In this case, the court discontinued the remediation proceedings because the company failed to meet its restructuring obligations. It was also unable to afford bankruptcy, since the costs of the process exceeded the company’s assets. The chain had to be completely liquidated.

“Having a wide retail network is a desirable business model in the consumer business. At the same time, it is very capital-intensive and carries special risks,” says Tomasz Ciąpała, the CEO of Lanĉerto

They are still fighting

The larger grocery chains have had to contend with the rise of the discount store segment, which has already put an end to such chains as Alma and MarcPol. “The example of Alma and of many others shows that we can now speak of the end of the delicatessen era in Poland. A lot has changed on the Polish market over the last two decades. The grocery segment has undergone a wave of transformation brought about by foreign discount stores. And these have been conquering the market. Firstly, they saw off the smaller local stores; then it was the turn of delicatessen-supermarkets and the hypermarkets,” relates Tomasz Starzyk, a representative of Bisnode Polska. Three subsidiaries of the Piotr i Paweł deli-supermarket group – Piotr i Paweł Sp. z o.o., Piotr i Paweł SA and Piotr i Paweł Detal Sp. z o.o. – have entered remediation. Unprofitable areas of the businesses are being phased out. “One of the steps announced by the management board was closing down Piotr and Paweł’s unprofitable stores. A process that is now underway. According to an announcement by the chain’s management, stores that are not generating any profits are to be closed down. Selected stores are also being sold off to sector investors at the same time. Five have so far been sold to Biedronka and two to Carrefour. Several franchisees have also decided to leave Piotr i Paweł and establish partnerships with other businesses. In the restructuring the management of the Piotr i Paweł Group is focusing on going ahead with each stage of the disposals, while holding negotiations with several investors from the sector. At the same time the Piotr i Paweł Group is operating under the supervision and in remediation – which means that the chain is settling its liabilities on an ongoing legal basis,” reveals Aleksander Rosa, a spokesperson for Piotr i Paweł. Currently the brand operates 85 stores, which is to be reduced to 76.

The elegant men’s outfitting sector has also been hit by changes on the market. Próchnik – the former leader in this segment and a significant tenant of shopping malls – has now disappeared. “When we launched our start-up under the name Lanĉerto.com, Próchnik was a mature business with a recognised brand, a wide customer base a recognisable design and a structure and had access to capital from the Warsaw Stock Exchange and its own fixed assets. Such examples show how important it is to adequately handle limited resources and have a strong organisational culture in this business. The situation we are in proves that a strong brand is admittedly an advantage but it is not the only one. In a time of such high oversupply, when consumers make their purchasing decisions, they are not interested in the shortcomings of the people who work in the purchasing, marketing, design, logistics, IT or production departments,” remarks Tomasz Ciąpała. Wólczanka and Bytom, which eventually merged to form the Vistula Retail Group, have also experienced problems.Polish footwear brand Gino Rossi is also waiting for a court decision over its future, but domestic rival CCC may turn out to be its salvation. “The financial situation of Gino Rossi has been difficult for some time. The potential acquisition by such a strong capital partner as the CCC group represents a great opportunity for us, not only to continue our operations but also to grow,” says Tomasz Malicki, the CEO of Gino Rossi. CCC has launched a bid to acquire a 100 pct stake in the company and has signed a contract for the purchase of all its existing debts with PKO Bank Polski.

Smaller and worse off

Each segment of the retail market has its own rules. You can, of course, look at the general factors affecting companies across the whole economy, but in the case of retail there is the added problem of having to adapt to a dynamically changing market as well as retail networks that have expanded too quickly. It should be noted that mall rents are a significant proportion of the costs of each of their tenants. A contract in a shopping centre is also often a huge obligation, as it is time-bound and cannot be pulled out off easily if the outlet turns out to be unprofitable. Large retail chains know how to handle such cases. Smaller businesses, such as franchisees or local tenants, are in a worse situation. One way to avoid the problems of operating a chain of stores is to set up separate companies for each location. In the event of the failure of such business, the owner files for bankruptcy exclusively for the company operating in that location. Under such a system the poor results of one store have no impact on the rest.

“It seems that the only losers in this uneven fight for the customer are the small, independent stores. Not seeing any chance for themselves to compete with the larger players, they are merging into retail groups and franchise chains. There are fewer and fewer independent operators from one year to the next. It’s estimated that almost 10,000 shops will disappear from the Polish market in 5–6 years. Just as many will be absorbed by franchises and smaller format chains. Regardless of the amount of tax imposed, the largest chains will cope and they will not cease to exist. Added to that, the ban on Sunday trading has done nothing to halt the decline in the liquidation of stores. Almost 11,000 small shops disappeared from the Polish market in the last year alone, which represents a 4 pct shrinkage y-o-y. According to our estimates, almost 260,000 stores are now actively operating on the Polish market,” reveals Tomasz Starzyk. ν

Anna Grudzień-Kurpiewska

legal advisor/licensed restructuring advisor

First of all – react

What are the first symptoms of the kind of financial difficulties that may require outside intervention to remedy?

It’s usually when the company’s turnover decreases dramatically and it becomes clear that there is no chance of turning the situation around in the short term. The high fixed costs, however, will continue – such as the rent in a shopping centre or an office building. Furthermore, there are going to be problems with payments to contractors – and so the spectre arises of court orders for payment and then bailiff proceedings become inevitable. So then it’s high time to introduce restructuring measures, without which the company would often be unable to continue its operations . The next step can only be filing for bankruptcy. And this is a very difficult situation for all parties to the business, as I have often found as a professional proxy and as a court supervisor or trustee.

When should restructuring be the right option ?

Bankruptcy is the only option when the company ceases to be able to pay its debts and can see no way out. The business knows that it will no longer be able to generate profits because the market has changed or there are other problems that cannot be overcome. That is, if a company’s obligations have become so great that even reducing them will not allow it to get back on its feet. These are the conditions for filing for bankruptcy as are actually stipulated by law. However, businesses that still see a way of operating viably can decide to restructure, if spreading their liabilities out into instalments or reducing them in agreement with creditors can be achieved and the company turned around. Of course, everything requires a detailed analysis because many similarities as well as significant differences are evident when assessing the legal situation of companies.

What are the benefits of being put under court protection?

It’s not the court that supports the restructuring process, but the specific measures provided by the new act. The first advantage is the suspension of enforcement proceedings. The biggest problem for distressed companies is the requisition of accounts and the bailiff procedures, which effectively block them from running their businesses and possibly any attempts to remedy the situation. With restructuring proceedings it’s possible to postpone the repayment of liabilities over time, spreading them out in instalments or even reducing them. It’s also worth emphasising that the other party will benefit more from such a model compared to bankruptcy. Restructuring also gives you the opportunity to sell your assets on a much better basis than would be the case in the enforcement proceedings, allowing you to pay off your creditors to a greater extent.

Who benefits from it?

Restructuring is beneficial for both the debtor and the creditor. For the debtor it’s an opportunity to get the business back on its feet. For the creditor, it represents a real chance to recover a much greater funds than from the bankruptcy of its contractor. Awareness is growing on the market that both sides can work together to correct the situation when they know these positive factors are in place. Besides, carrying out restructuring does not rule out the possibility of bankruptcy if the recovery process fails.

What should companies do when they fall into such difficulties?

An analysis of the last few years of its operations should be carried out as soon as possible to find out what the greatest burdens are for the company and what has caused these problems. In the next stage, it’s important to contact a specialist who has some distance from the situation and the necessary knowledge and legal tools to show you the right direction to go in and take you through the restructuring process – or even, if necessary, through the bankruptcy of the company. It needs to be remembered that business people whose companies are in serious trouble can often be in a distressed mental state, which can often get in the way of making the right decisions and judging the situation properly.

How long might such a process last?

In certain cases bankruptcy can take several years. It all depends on the complexity of the company’s legal situation as well as the volume and the legal status of the assets or employee issues. Restructuring, on the other hand, takes around a year on average, depending on the model you opt for. But each case is different. Recent data from the Central Economic Information Centre shows that the number of Polish companies restructuring increased by more than 30 pct last year. The number of bankruptcies remains at a similar level but with a slight downward trend. And this is actually a very good sign for the market.