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.

Analysis of the Lithuanian construction sector

Financial and performance indicators in the construction sector reveal positive rather than negative trends. The boom in real estate emerging in the time of the pandemic has remarkably boosted the sectoral activity (during the first 6 months of this year alone the volume of constructions works grew by almost one fifth) and positively reflected in performance indicators of most of the companies. Sectoral earnings have been rapidly growing both on the domestic and foreign markets. After discounting the impact of seasonality and working days abroad, the volume of construction works is an increase of 21.5% year-on-year. The number of construction companies have been mushrooming, accounting for an increase by a third during the second quarter of this year compared to the previous year.

Financial statements filed by construction companies show that the number of construction companies in Lithuania in 2021 has grown by additional 531 from 15,784 to 16,316 (an increase of 3.4%) year-on-year. A very similar pace of growth (4.1%) was observed in the average corporate earnings (from EUR 809,994 to EUR 842,872). In terms of the staffing level, though, it has decreased slightly from 102,072 to 101,833. Despite a favorable situation, managers of construction companies are very cautious about the growth in the number of staff due to higher labour and other construction costs. Due to a more pessimistic mood in the sector, during summer this indicator started to decrease.

Another important positive factor is the decreasing number of debts and their aggregate values. For instance, during pre-pandemic August 2019 the number of corporate debts in construction industry stood at 12,336, with their aggregate value of EUR 128.7 mln. At the same period in 2020 the number of corporate debts stood at 11,539 compared against a reduced value of debt of EUR 94.3 mln. Although at the end of last August the number of corporate debts in the construction industry grew once again to 12,055, the aggregate debt value accounts for EUR 96.6 mln.

Some positive trends may be seen in the solvency of the construction industry. For instance, a year ago 23% of companies in this sector belonged to the high or highest group of bankruptcy risk, whereas this year the number of such companies dropped to 20%. In terms of delayed payments, some improvement may be observed too: last year the number of companies within the group of high and highest risk of delayed payments accounted for 47%, compared against 37% this year.

A number of construction companies going bankrupt has been decreasing steadily. In 2017-2020 the number of bankruptcies dropped from 366 to 163, whereas the updated statistics for this year give a solid ground to expect a further similar decrease in the number of reported bankruptcies.

Despite the reported drop in earnings in 2020 from 10% to 4% in comparison to 2019, other performance indicators in the construction industry have improved. For instance, the corporate sales median increased by 16% (from EUR 143,155 to EUR 166,133), the quick ratio has grown from 1.86 to 1.95, while the profit margin before tax increased from 1.25 to 1.35. The equity ratio has improved from 43.83 to 46.23, the accounts payable turnover decreased from 134 days to 128 days, whereas the accounts receivable turnover shortened from 57 to 51 day. EBITDA grew from 9.1 to 12.3%.

Jekaterina Rojaka,

Head of Business Development and Strategy, Creditinfo Lithuania