Central Bank's 'concordat' analysis: Reasons and consequences leading companies to the process

The CBRT published an analysis regarding concordat processes on its blog page, Merkezin Güncesi.

The analysis, which states that firms under financial stress may request a concordat to obtain payment relief while continuing their operations, noted: "The concordat provisions in the Enforcement and Bankruptcy Law aim to extend a debtor's debt, reduce the debt, or save the debtor from a potential bankruptcy. This article examines the relationship between recent concordat requests and financial conditions."

The analysis conveyed that the debt, debt-repayment capacity, and liquidity status of firms are decisive in concordat processes.

The analysis, which reported that the general debt level of concordat firms is higher compared to other firms and their liquidity levels are significantly lower, stated: "While the ratio of commercial debts to total assets for these firms is 36 percent, this ratio is seen at 11 percent for other firms. Similarly, while the median ratio of cash and bank accounts, referred to as cash equivalents, to short-term liabilities for concordat firms is approximately 2 percent, this ratio is around 8 percent for other firms."

The analysis included the following assessments:

While it was stated that concordat firms had high debt and low liquidity in previous periods as well, it was noted that they drew attention when financial conditions tightened. According to the analysis, firms that encounter unexpected liquidity shocks and are close to their borrowing capacity have a higher probability of defaulting on commercial loans.

41 PERCENT OF FIRMS ARE IN DEFAULT

To understand the proximity to default of firms that requested a concordat in 2024, risk indicators for the first six months of 2023 were examined. The findings indicated that firms requesting a concordat had financial problems even before the tightening. It was observed that as of June 2023, when monetary tightening began, 41 percent of the firms that declared a concordat in 2024 were in default, 61 percent were highly indebted, and 26 percent had low liquidity.

The analysis, which reminded that firms in the concordat process may not be able to postpone payments to their suppliers, provided the following information:

"The CBRT closely monitors the default developments of real sector firms in terms of economic activity, financial stability, and the continuity of the supply chain. Accordingly, firms that requested a concordat and were granted a temporary grace period in 2024 account for 0.38 percent of the total cash commercial loan balance, 0.07 percent of total employment, 0.16 percent of total sales, and 0.18 percent of total foreign sales. The suppliers of concordat firms account for 0.23 percent of the total cash commercial loan balance, 0.12 percent of total employment, 0.21 percent of total sales, and 0.14 percent of total foreign sales."

FIRMS CONTINUE THEIR OPERATIONS

While it was emphasized that the concordat process also affects inter-firm trade, it was stated that the number of customers and suppliers decreased, but remained horizontal after the concordat. It was noted that the problems experienced in cash flow and debt management were also felt by other firms. It was observed that the commercial relations of concordat firms weakened before the process, but firms were able to continue their operations after the concordat.

In summary, the analysis stated that concordat requests from firms under financial stress operating with high debt and low liquidity can increase periodically, and assessed: "It is observed that the concordat requests made within 2024 are concentrated in firms that could be considered in the risky category even before monetary tightening and have a relatively low weight in the economy."