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How much do Greek non-viable enterprises cost: Findings from an enterprise restructuring simulation exercise

The prolonged and deep economic recession has had an intense impact on the profitability of the Greek corporate sector, which in turn led to a steep increase in non-performing loans and consequently to the creation of a whole “generation” of non-viable or “zombie” firms. In the past, all the attempts to address the problem either from the Greek state or from the banking system have been timid or fragmented, resulting –in most cases – in generating vicious cycles of forbearance and “evergreening” which kept alive a substantial number of enterprises without any realistic hope of recovery.

However, maintaining the operation of a significant percentage of non-viable corporations entails significant costs not only for the business and the banking sectors but for the entire economy as well. This happens because, as non-viable enterprises operate with low levels of productivity, they lower the productivity of the whole economy. In addition, as long as they remain alive, they trap production factors (capital and labour), thus preventing the expansion of viable enterprises. At the same time, as they do not operate on purely profit maximisation criteria, they “contaminate” the profitability of the rest of the economy. Finally, non-performing loans burden the profitability and capital adequacy of banks, restrict the financing of viable enterprises and increase the cost of funding for the entire economy.

As the conditions for more radical and long-term solutions to the problems of the domestic entrepreneurship seem to mature, at the same time there is a more urgent need to assess the potential benefit that can be gained for all stakeholders from a large-scale restructuring programme of Greek non-viable enterprises.

This need is addressed in the present study, which attempts to assess the potential benefits of restructuring non-viable enterprises as follows: As a first step, the Greek corporate sector is divided into viable and non-viable enterprises and their distinct performance is estimated in terms of profitability, capital structure and liabilities.

Having defined the two distinct populations of (viable and non-viable) enterprises, we then proceed by simulating the outcome (in terms of profitability, turnover and “curing” of liabilities) that would result from a theoretical business restructuring programme, where non-viable enterprises are resolved and their assets (and part of their liabilities) are absorbed by viable companies of similar size and average (for their size) performance.

A key assumption of the simulation scenario is that the percentage of the liabilities that will be transferred to the viable corporates will be such that will not alter their pre-absorption balance sheet structure (i.e. the viable companies’ liabilities/total assets ratio will be the same in both pre- and post-absorption states). The part of the liabilities that will be transferred will become performing/current again, providing an indication of the non-performing liabilities curing rate. The remaining part of the liabilities that will be left behind will have to be written-off, thus providing an estimate of the restructuring costs to the creditors of non-viable enterprises.

Starting from a very conservative definition, according to which a non-viable enterprise is an enterprise that is in operation for at least five (5) – in order to exclude the start-ups – and for three (3) consecutive years its profitability levels are so low that they are insufficient to cover current interest expenses (i.e. in technical terms, the financial expense coverage ratio is less than one). Based on the above, the following conclusions can be reached:

  • Non-viable enterprises account for 7.1% of the total sample in 2016. The percentage of non-viable enterprises aged between 21 and 40 years is particular high (37.8%).
  • Most non-viable enterprises (8.2%) are micro enterprises, followed by medium-sized (6%) and small (5.2%) enterprises, while the lowest percentage (4.4%) is recorded amongst large enterprises. However, because of their size, the economic impact of large non-viable enterprises is significantly higher compared to that of other size cohorts.
  • Trapped in non-viable enterprises is a productive capacity (as reflected by their asset value) amounting to €28.4 bn, which equals to 16.3% of GDP.
  • Accordingly, non-viable enterprises have undertaken €23.5 bn liabilities or 22.6% of the total liabilities (which is reasonably assumed that they cannot repay) and have annual €613 mn financial expenses.
  • On average, viable enterprises do not have very high liabilities to assets ratio (56.1%), whereas non-viable enterprises have a significantly higher ratio (82.6%).
  • The results of non-viable businesses at EBITDA level amount to €-413 mn, while at the level before taxes they reach €-1.3 bn. Thus, the EBITDA margin stands at -10.3% and the return on assets (ROA) at -1.5%.

The fact that more than 16.5% of the total production capacity (assets) of the non-financial sector of the Greek economy is trapped in non-viable business schemes is a huge cost not only for the enterprises themselves and their creditors (suppliers, banks, public state bodies, etc.) but for the whole community as well.

The methodology developed to assess the potential benefit from a restructuring programme for non-viable enterprises is a simulation exercise according to which the total assets and a part of liabilities of the enterprises identified as non-viable are absorbed by viable enterprises of similar size. The results of this exercise show that:

  • The potential profitability (EBITDA) increase is €2.6 bn.
  • The potential operating revenue increase is estimated at €16.7 bn
  • The liabilities that – through their takeover by viable enterprises – could be repaid again amount to €15.9 bn.
  • The cost of restructuring in terms of “haircutting” part of the liabilities – that will not be transferred to the viable enterprises – is estimated at €7.6 bn.
Ilias Lekkos
Chief Economist
Paraskevi Vlachou
Economist