Debt problems in trade: victims of the crisis and foreign currency loans
Column by Andriy Volkov, Founder and Managing Partner of Investohills Group of Companies for Retailers.
According to the National Bank, the share of non-performing loans (NPL) in the banking system of Ukraine as of November 1 this year decreased to 32.7% compared to 33.3% a month earlier. Since the beginning of the year, the decrease in the share of NPL amounted to 8.4 percentage points (UAH 58.2 billion in absolute value) and occurred in banks of all groups. As of November 1, the portfolio of problem debts in absolute terms amounted to UAH 372 billion.
At the same time, most of the toxic loans (over 50% of NPL) still fall on trade. So, as of September, more than 84% of retail loans or about UAH 140 billion were problematic, which was more than twice the volume of NPLs of all industries. Andriy Volkov, founder and managing partner of Investohills Group of companies, spoke in a column for retailers about the reasons for the high concentration of problem debts in trade.
What explains such a significant concentration of problem debts in trade?
Loans for trading operations
These are loans that are practically unsecured. Liquid collateral for such borrowings is rarely provided. Usually these are bank loans for equipment, for goods in circulation. That is, in fact, for future cash receipts. And of course, such loans become the most difficult for the lender if there is a need to recover them.
Low profitability of trade
In this business, every penny counts. Therefore, before the crisis of 2009, all large trading companies preferred to be credited in foreign currency, since the rates on loans in dollars or euros were 2-3 percentage points lower than on loans in hryvnia. And for the borrower, this difference was of great importance. But after the hryvnia sharply devalued, borrowers found themselves in a difficult situation. Especially considering that trading companies did not have any foreign exchange earnings.
During the crisis, trade suffers first of all. Consumer demand is falling, the product range is shrinking, turnover is decreasing, profitability is decreasing and at the same time the cost of borrowing is sharply increasing. And trade is among the first to lose the ability to service loans.
Various withdrawal schemes
It is also not uncommon for trading companies to participate in schemes to withdraw money from banks. As a rule, funds are withdrawn to “dummy” companies, at best, with some turnover, but without real assets. And when unscrupulous borrowers come up with the idea to “crank” such a scheme, trading companies are often used for these purposes. Moreover, many legal entities have at least one type of activity related to trade among their QUEDS. So it is not surprising that fraudsters actively use those companies that are connected with trade, and above all with wholesale, to wash money out of banks.
At the same time, it is hardly possible to say that the credit burden causes the bankruptcy of trading companies. It is difficult to recall any high-profile precedents in the Ukrainian market. Except for the network “Amstor” by Vadim Novinsky, whose credit obligations were 88 times higher than the volume of assets. The network was officially declared bankrupt in 2019. According to court materials, the total volume of creditors’ claims against the debtor is UAH 2.33 billion, and the volume of assets is UAH 26.3 million.
There is a similar story with the Brusnichka network, which was part of Rinat Akhmetov’s SCM. Until 2014, the stores of this chain operated in Donetsk and Luhansk regions, so with the outbreak of hostilities in this territory, the chain lost 53 stores, which brought 80% of all profits. In October 2019, the company declared bankruptcy. At that time, according to RAU, the retailer’s debt reached UAH 1.098 billion, of which UAH 186 million was owed to banks. Despite the fact that the estimated value of the company’s assets was only about UAH 223 million. That is, credit obligations exceeded the value of assets by 5 times.
In our portfolio of distressed debts, there was also one of the large chains that took loans for its own stores and other real estate owned by it. When we bought this debt and started collecting it, we achieved a result in negotiations literally within a month. Because the owners of this network understood that they would have to sue us for a long time, which would negatively affect the work of the business. And since the network felt quite well and planned to develop, the debtor decided to repay the debts as quickly as possible.
Trade is a risky industry from the point of view of lending, which is strongly influenced by the changes that occur in the macroeconomic field. Besides, it’s not the most high-margin business. And if a company does not have a large equity capital, it will be quite difficult for it to survive in a crisis.
After all, it is important for a trading operator to remember that as soon as he ceases to fulfill credit obligations in full and he has a delay in payment even for a month – this is already a problem. Because if the company starts to disrupt the loan repayment schedule systematically and makes a delay for a long time – this may be the basis for compulsory debt collection.
Therefore, I would advise a conscientious borrower to weigh everything very quickly and understand what he can really repay and in what mode. That is, to develop a plan for yourself to get out of the situation and go with this plan to the lender.
After all, banks, in fact, also understand the situation well and are ready to make concessions if the debtor behaves adequately, does not engage in fraud and agrees to negotiate. In this case, you can always find a compromise option. Achieve debt restructuring, installment repayment or partial write-off.