Insolvency risk of small and medium-sized construction companies increasing

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The solvency situation in the construction sector was relatively stable in January, although an increase in the number of restructurings has been notable for several months.

According to information in the Monitor Sądowy i Gospodarczy, three construction companies went bankrupt in January, one less than in December and the same as a year earlier. In the last 12 months, 49 bankruptcies took place in the sector, which constitutes 10% of all bankruptcies of commercial law companies in Poland in that period.

The construction industry bankruptcy index prepared by the Export Credit Insurance Corporation and the Polish Fund for Reconstruction and Development (PFRI) maintained in January its previous month’s value at 1.04%, while a year earlier it amounted to 1.23%. The index of restructurings commenced increased from 1.17 to 1.32%, while a year ago it was 0.67%.

According to GUS, in February the index of economic climate in the sector amounted to -17.7, compared to -18.7 in January. Half of the surveyed companies do not expect at present any payment backlogs, and 1/3 of them see such a risk but on a small scale. In turn, 2/3 of the surveyed entities declare that in the current conditions they are able to survive on the market for more than three months.

Janusz Władyczak, President of the Export Credit Insurance Corporation:

The growing number of restructurings is a harbinger of financial problems of small and medium construction companies. We predict that such a situation may last for another year and a half, before local government and cubature investments start.

Therefore, insurers of receivables will be cautious about increasing their exposure in the construction sector and will continue to observe how the winter, which is more severe than in previous years, affects the timeliness of contract completion. This is compounded by rising material prices and low prices offered in tenders. According to the General Directorate for National Roads and Motorways, companies participating in tenders held at the beginning of the year did not take into account the recent dynamic increase in fuel prices. On the other hand, there is a high availability of workers in the sector, so there is no pressure on wages. Invoice payment times are also improving.

Dr Damian Kaźmierczak, chief economist at the Polish Association of Construction Employers:

The year 2021 may be decidedly more difficult for the domestic construction industry than 2020, which was marked by a pandemic. So far, the epidemic has had only a moderately negative impact on the construction industry, but let us remember that it always feels the investment slowdown with a delay. The clear decrease in investments in local governments and in some areas of volume construction, mainly in the segment of offices and hotels, is likely to result in the deterioration of the financial condition of small and medium-sized subcontractors and smaller local contractors. It is in this group of entities that we can expect an increase in the number of restructuring and bankruptcy proceedings, but it does not seem that this phenomenon will assume a mass scale. The decline in local government and volume investments and the moderate slowdown in investments in the transport infrastructure segment have contributed to an intensification of competition for new orders among large road and railway contractors. However, the large players have managed to accumulate record order books and are mostly entering 2021 in a very good financial position. In the coming months, however, their margins may be negatively affected by rising steel prices, which have not risen as fast as in recent weeks for a long time.

Source: PZPB