What to expect in the Czech market
Although the impact of COVID-19 is wide-ranging, economic forecasts seem to be fairly optimistic for the Czech Republic. Many businesses were significantly hit. The banking industry – although less profitable - is still in a good shape. Despite the government support measures, the number of corporate insolvencies is gradually increasing, and a further escalation is expected starting in the middle of 2021.
The Czech Republic is currently facing the second wave of the pandemic. Although businesses have been heavily affected, the situation at the end of 2020 showed that companies in industry are beginning to adapt to the new conditions and that foreign demand is growing again. Indeed, domestic GDP is forecast to grow by 1.7% in 2021. However, the further development of the Czech economy will primarily be determined by government measures and restrictions mitigating the spread of COVID-19, as well as by the vaccination effort, rising unemployment, growth in foreign demand and continuing support in the form of government programmes. It is widely expected that the Czech Republic will not return to its pre-pandemic level before 2023.
The Czech Government has enacted several measures granting economic relief and financial assistance to businesses affected by the COVID-19 pandemic. Besides sector-specific programmes, these measures also include guarantee programmes designed to facilitate access to business financing for sole traders, small and medium-sized enterprises, and large export companies, having been designed in cooperation with the state owned Českomoravská záruční a rozvojová banka, a.s. ("ČMZRB") and Exportní garanční a pojišťovací společnost, a.s. ("EGAP"). All commercial banks can arrange such a loan, which would be guaranteed by ČMZRB or EGAP once all necessary conditions are met.
The banking sector has not yet been significantly affected by COVID-19
The postponement of loan instalments for both individuals and corporate clients during 2020 was a typical measure aimed at preventing unnecessary and early insolvencies that could have been caused by a drop in household and corporate incomes due to the COVID-19 pandemic.
This postponement was primarily delivered in the form of a "loan moratorium" under Act No. 177/2020 Coll. on some measures in the area of loan repayment in connection with the COVID-19 pandemic. The loan moratorium was offered on both consumer and business loans (including mortgages) for a period of 3 or 6 months, without having to prove a causal link between the pandemic and the reasons for postponement. The loan moratorium was in effect until 31 October 2020, and in total over 12% (approx. 360,000) of all debtors with bank loans used it. Despite initial doubts, the total percentage of non-performing loans has not increased.
Even after the end of the loan moratorium, deferrals of repayments may still be individually agreed with credit institutions. Naturally, banks are relatively cautious in this area.
The total volume of mortgages sold during 2020 reached CZK 254 billion (approx. EUR 9.5 billion), which is well above the record years of 2016 and 2017. This trend is not expected to continue in 2021.
Savings and credit cooperatives are facing problems
Savings and credit cooperatives had their second worst year on record, with losses reaching almost three times those of previous years. Although the sector has continuously been facing problems since the end of 2017, the need to create loan loss reserve funds during the pandemic while interest rates have been falling only exacerbated the problems. Savings and credit cooperatives that are supervised by the Czech National Bank are thus currently facing an increased need for capital. If their shareholders are unable to inject this capital, this could create opportunities for distressed funding or even M&A.
M&A market – don't expect major discounts yet
The M&A market has also been sharply hit in the Czech Republic. However, there are signs that some investors (in particular, the investors that have cash ready to invest) have adapted to the current situation and that the market (or at least some of its segments) could slowly be returning to normal. It is still early days to say if massive discounts could be expected in the near future.
Real estate market
Despite the significant impact of the COVID-19 pandemic on the real estate market in the Czech Republic, forecasts remain optimistic and the return of investment volumes to pre-pandemic levels in the second half of 2022 is expected.
During 2020, the demand for office space in Prague fell by 30%. The current vacancy rate is 7.2%, with this figure expected to continue growing slightly in 2021. It is estimated that there was a 20% decrease in investments in the Czech Republic in 2020 compared to 2019. Although shopping centres were strongly hit during the first wave of the pandemic, attendance at shopping centres increased significantly following the launch of government measures in May 2020 and, overall, remained 15% lower than a year earlier.
Is a wave of corporate insolvencies coming?
The number of corporate insolvencies is gradually increasing. However, the actual situation will probably not become fully apparent until the second half of 2021. A large wave of insolvencies is expected, as the extraordinary measures affecting Czech insolvency law will expire, unless prolonged, at the end of June 2021. This means that debtors will no longer be able to benefit from the extraordinary moratorium, and they (or their directors) will once again be required to file an insolvency petition without undue delay once they learn – or should have learned if they had exercised due care – that the company is insolvent.
From this point of view, it is of vital importance that companies swiftly resolve their pre-insolvency situation (if applicable). The extraordinary moratorium may actually conserve an unfavourable situation and the problem often gets deepened, as creditors' chances of obtaining any significant value from their receivables are reduced and the time available to find a meaningful solution is shortened. Therefore, it makes sense to use this extra time to address the underlying issues themselves by discussing the restructuring of debt with creditors and business partners, either out of court or through statutory reorganisation (in the form of either pre-packaged or standard reorganisation).
Forthcoming legislation on preventive restructuring
In July 2019, the new Directive (EU) 2019/1023 of the European Parliament and of the Council on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, and amending Directive (EU) 2017/1132 (Directive on restructuring and insolvency) (the "Directive") came into force. This Directive should be transposed into Czech law by 17 July 2021. However, it is highly possible that this deadline could be extended until 17 July 2022.
Statutory legislation regarding preventive restructuring does not yet exist in the Czech Republic, and the EU Directive will be implemented into the Czech law in the form of a separate legislative act. However, no bill has yet been published.