One in five construction companies on the brink of bankruptcy in Lithuania

As shown in a recent analysis of the construction sector conducted by Creditinfo Lietuva, almost a fifth (18%) of construction companies1 are currently on the brink of bankruptcy, while almost a third (31%) are at risk of defaulting on their payments. According to publicly available data2, construction companies, as a whole, exhibit shorter operating histories and offer lower wages compared to other sectors. Financial experts are therefore advising caution when engaging with construction firms.

There are currently 19,167 construction companies in Lithuania, employing almost 108,000 people. The numbers of construction companies and their employees have shown consistent growth since 2020. In 2020, there were 16,144 construction companies with an employee count of nearly 102,000. By 2021, the numbers had risen to 17,171 companies and over 102,000 employees, and at the beginning of 2022, the sector boasted 18,512 companies, employing in excess of 106,000 people.

The average age of a construction company CEO is  about 46 years, with a striking 87.5% of these leaders being male. Compared to other sectors, construction companies have a comparatively shorter average lifespan in the market, standing at 10 years, in contrast to the national average of over 13 years.

Despite witnessing among the fastest growth in the current year, salaries for construction workers still lag behind the Lithuanian average. According to data from Sodra, construction worker wages surged by 22% year-on-year in the second quarter, reaching EUR 1,300 before tax (EUR 880 net), while the average earnings of full-time workers across Lithuania rose by 12.3% year-on-year, amounting to EUR 1,980 before tax.

The risk of bankruptcy among construction companies is twice as high as the national average

Currently, 18% of construction firms fall into the high and highest bankruptcy risk categories, compared to 20% at the beginning of this year and 19% at the beginning of 2022. The high and highest risk classes of late payment now account for 31% of construction companies, up from 37% at the beginning of 2023 and 34% at the beginning of last year.

For all companies in Lithuania, excluding the construction sector, 9% of all companies in the country were in the high and highest bankruptcy risk classes at the beginning of 2023, compared to 12% at the beginning of 2022. At the beginning of this year, 17% of all Lithuanian companies belonged to the high and highest risk classes of late payment, with 21% at the beginning of 2022.

“Although the construction sector has experienced a period of growth in recent years, it is particularly sensitive to borrowing conditions, fluctuations in demand and geopolitical changes. During the pandemic, builders experienced a boom in demand – with many people deciding to improve their homes – low energy prices and relatively cheap borrowing. Subsequently, the construction sector encountered a number of challenges stemming from disrupted supply chains and the need to withdraw from cooperation with sanctioned countries,” explains Ekaterina Rojaka, Head of Business Strategy and Development at Creditinfo Lithuania. “In recent months, with the European Central Bank raising its base interest rates, borrowing has become a more costly affair, reducing people’s ability to borrow, and homes built with credit have been slower to sell.”

This year, bankruptcy proceedings were initiated for 136 construction companies

Since 2007, a total of 44,256 construction companies have been declared bankrupt in Lithuania. The highest number of bankruptcies occurred in 2009 (445), 2016 (351) and 2017 (367). Only in 2007 was the number of bankruptcies below 100, with a total of 67. In Lithuania, 163 construction companies faced insolvency in 2020, 131 in 2021 and 237 in 2022. In the first 8 months of this year alone, 136 construction companies in Lithuania have declared bankruptcy.

As of the beginning of September this year, there were 11,512 construction company debts on record, collectively burdened with nearly EUR 90 million in debts, with 962 new debts registered in the first 8 months of the year, according to the credit bureau systems. The average size of a single debt is EUR 7,800.

“When entering into contracts with construction companies, it is advisable to pay more attention to their risk assessment and to clearly negotiate payment terms,” Rojaka commented.

According to data provided to the Centre of Registers, the top 10 construction companies with the highest revenues last year are: YIT Lietuva (EUR 140.6 million), AB Kauno Tiltai (EUR 134.4 million), Conres LT (EUR 100.1 million), Autokausta (EUR 83.2 million), Tetas (EUR 79 million), Staticus (EUR 75.9 million), Merko Statyba (EUR 70.4 million), Žilinskis ir Co (EUR 68.7 million) and INGUS (EUR 63.9 million).

Almost one-fifth (19%) of companies in this sector have not yet submitted their financial statements for 2022.

According to Rojaka, state orders and building modernisation programmes will support the construction sector’s activity in the near future, as demand for real estate slows down. However, falling demand has only a limited impact on the final prices of construction services, as cheaper building materials do not compensate for the sector’s rapidly rising wages, which account for more than a quarter of total construction costs. As a result, construction continues to become more expensive, with a 3.7% year-on-year increase in construction costs in July, with the fastest increase in building repair costs, which rose by 9.2%.

More information:
Jekaterina Rojaka, Head of Business Strategy and Development at Creditinfo Lithuania (jekaterina.rojaka@creditinfo.com)

Or visit: lt.creditinfo.com/en

Notes:

1 In this report, construction companies are defined as companies that have publicly declared to the State Data Agency (SDA) the activity codes of Section F (41-43) of NACE2 as the company’s main activity.

2 The data in this press release is based on information publicly provided by the State Enterprise Centre of Registers, SODRA, the State Data Agency (VDA), and other sources.

Number of bankruptcies up by 26% in Estonia

Creditinfo’s bankruptcy survey revealed that the amount of bankruptcies grew last year for the first time in ten years and increased 26% compared to 2019 in Estonia.

Last time the number of bankruptcies grew significantly was due to the global economic crisis in 2008 and 2009 when the growth measured up to 150% in annual comparison. There was marginal growth (+2.4%) in 2017, but this was a shift by eight companies. In 2020, the number of bankrupt companies increased from previous year’s 271 to 341 ( 26%). The share of companies that have gone bankrupt is at 0.15% of all registered companies.

“The amount of bankruptcies remained at a low level in 2020, but there was still a trend of significant growth in the number of bankruptcies that we have not seen since the beginning of the previous great economic crisis. It may be assumed that this was partly due to the effects of the corona crisis, but since the bankruptcy process is long-term, we will probably see the greater effect here next year,“ explained Creditinfo Estonia’s analyst Helen Tinkus.

There was also growth in the last decade’s continuous downtrend of the number of asset-less companies, where bankruptcy rates dropped due to the absence of assets. During 2010-2019 the number of dropped bankruptcies decreased on average by 14% yearly. In 2020, the number of asset-less companies increased by 49%.

“This might have been caused by the fact that the economic environment had become insecure because of the corona crisis. More business plans failed completely and the companies were unable to gather any assets at all before the insolvency situation developed. At the same time, there were also some asset-less companies that showed substantial turnover numbers in the years prior to the bankruptcy,“ Tinkus added.

The areas with the highest rate of bankruptcy are still hospitality and catering, manufacturing industry and construction. The rate of bankruptcy was above the average in wholesale and retail as well.

“There have been no changes in the fields of activity with the highest bankruptcy rate in the recent years. But the share of bankrupt companies in the hospitality and catering sector grew faster than in others, both compared to other fields of activity and to previous periods. These are the fields that was influenced the most by the corona crisis and the restrictions. Based on the payment defaults and wage compensations statistics, we can predict a greater effect of the crisis on the companies operating in the field also in the coming years,“ Tinkus stated.

Creditinfo Estonia Ltd has conducted bankruptcy surveys about Estonian companies since 2000. During the 20 years the number of bankruptcies has both increased and decreased in waves, reaching the peak level in 2009 as a result of the global economic crisis. In 2011 the number of bankruptcies fell by a remarkable 40%, in 2012 by 20%. Bankruptcies have decreased steadily also in the following years, reaching the pre-crisis low level in 2015.

Ends.

Media Contacts:

Rain Resmeldt Uusen, Head of Marketing – Creditinfo Estonia

Email: turundus@creditinfo.ee

Tel: +3725018998