Action to improve the business conditions for the real sector

 

1)      an amendment was made to the Banking Act, which does not require banks to submit a takeover bid in the event of the acquisition of a capital investment in a corporate restructuring process for a period of two years after acquisition;

 

2)      proposals were drawn up in connection with the requisite changes in insolvency legislation;

 

3)      solutions were formulated in connection with the conversion of banks' claims into corporate equity and the valuation of the investments thus acquired;

 

4)      solutions were formulated for the efficient management of capital investments acquired via the conversion of banks' claims;

 

5)      regulatory changes were adopted for banks, the purpose of which is to support the process of restructuring the real sector.

 

Here, in conjunction with representatives of the Bank Association of Slovenia, the creditor banks and the Chamber of Commerce and Industry, the Bank of Slovenia is also coordinating activities to reach agreement over acceptable terms for commercial, financial and ownership restructuring to improve the financial position of firms, to increase their ability to repay debts and to reduce the requirement for additional impairments and capital in the Slovenian banking system.

 

The firms included in these activities are active in various sectors. Despite the differences in business from sector to sector, the Bank of Slovenia has noted a number of common features that lead firms into financial difficulties. These include:

 

a)      high indebtedness and high financing costs deriving from the process of privatising the firms or from borrowing for unprofitable activities outside the core line of business;

 

b)      over-leveraging, which hinders investment aimed at modernising or expanding existing production capacity;

 

c)      bad business decisions by the management in the past. Firms have invested in unprofitable projects with questionable cash flows, have expanded turnover past their own capacities and have acquired financial investments without direct complementary effects on their own core lines of business. These decisions are mostly the result of a lack of awareness of individual sectors and a shortage of the requisite experience for successfully running a business;

 

d)      past mergers and acquisitions of firms from different sectors into financial holding companies, which has created unprofitable conglomerates that have prevented the development of the better-performing firms in the group, the sell-off of non-strategic investments, and lending for business activities at individual firms;

 

e)      a reluctance of the banks to lend for investment, to provide liquid assets for the short-term financing of working capital and to issue new bank guarantees as a result of a lack of relevant and complete information about firms, up-to-date financial statements, a low level of equity financing and an unwillingness on the part of the owners to speed up the ownership and operational restructuring of firms;

 

 

f)       an irresponsible attitude to assets, particularly at firms under majority government ownership, and the financial weakness of the existing owners;

 

g)      insufficient engagement on the part of the owners in seeking solutions for corporate restructuring. This is particularly the case for firms under majority government ownership, where in the absence of any strategy for the management of state assets and given the shortage of coordinated action the government has laid the burden of rescuing firms on the banking system;

 

h)      a lack of proper economic policy, strategy and government vision in strategic economic sectors, and the corresponding legislative deficiencies, which are reducing corporate competitiveness in individual sectors such as the lumber industry, agriculture and the food industry;

 

i)        existing insolvency legislation, which is preventing faster corporate restructuring.

 

The information obtained in the project to rescue firms in difficulty with good prospects revealed a range of problems that are not merely the result of the global financial and economic crisis.

 

Addressing the adverse economic situation in Slovenia requires corporate owners to take a more active and more responsible role, and for the government and para-state funds, which have often acted against the economic interests of firms, to take a more responsible role in the case of state-owned firms. Here the key is drawing up the right strategy to manage state assets in a centralised, coordinated manner, and to carry out restructuring programmes. At the same time it is vital to draw up a long-term government strategy for strategic sectors and systemically important firms, including detailed industrial policy, the determination of objective criteria for assessing strategically important sectors or firms, and the examination of options for providing aid or incentives in the form of subsidies.

 

Resolving the problems described will also demand changes in the legislation governing insolvency proceedings. Current insolvency legislation is preventing faster restructuring of firms, where despite over-leveraging or even negative equity the existing owners and/or management can block or delay the initiation of insolvency proceedings and corporate restructuring. Appropriate options are not available to creditors that would prefer to participate in corporate restructuring, despite such actions by the owners or the management. Even when there is consensus between the creditors and the owners regarding corporate restructuring, it is impossible to reach such agreements quickly and efficiently.

 

Corporate difficulties can currently be seen in a significant part of the economy. The inability to address problems when they are still relatively small, and the existing owners’ inability to provide capital support for firms in difficulty are causing problems in the unnecessarily high number of corporate bankruptcies, which are also having an adverse impact on bank performance. The changes in insolvency legislation should give creditors or new investors more opportunity to be involved in corporate restructuring where the owners are not capable of resolving the issue alone.

 

The settlement procedure between creditors and debtors outside insolvency proceedings also needs to be defined. The new law should allow fast-tracking of agreements on such settlements, and should safeguard their effects if a suitable number of creditors enter into settlement with the debtor. The regulation of such agreements is recommended by the IMF, the World Bank and the European Bank Coordination Vienna Initiative. Because such settlements would be reached under a simplified/fast-track procedure, their positive effects could manifest themselves relatively quickly after the amendment of the legislation. It is emphasised that the proposed fundamental changes to insolvency legislation should be adopted without delay.