The rapid rebound in construction activity in the last five years has seen thousands of new companies set up to provide services as part of the procurement chain. Like most start-up businesses, many of these are operating on a thin capital base and are often only one bad customer away from having cash flow troubles.
In the construction sector, we are used to seeing a domino effect, where one big player going to the wall causes many others to fail in its wake. For others who have experienced rapid growth in turnover, the impact of COVID-19 interruptions on cash flow, alongside increased levels of working capital needed to cover the gaps between completing contracts and collecting payment, has now left such companies in serious financial difficulty.
We often see circumstances where fast-growing businesses use up their available credit lines and then recognise too late that they need to raise funds to be able to meet essential payments to their creditors. This is the essence of “overtrading”, where a business faces constant cash flow problems. Without formal restructuring these businesses can easily fail.
The potential for companies in the construction sector to have warehoused taxes may also create hidden holes in their balance sheet.
Nowadays the procurement process is likely to focus on the solvency of the contractor before a contract is awarded. Those that show signs of cash flow strains will be weeded out at the tender stage, further exacerbating their problems as they will struggle to secure new work and future revenues.
Once the construction phase has begun, there is still a danger that even the most carefully vetted contractors can get into financial distress. In such circumstances, the best outcome for everyone is clearly for the contractor to be able to complete the works as agreed. That is why early intervention by an external expert, skilled in turning around distressed construction firms, is essential.
In many cases, a gentle course correction can be enough to stave off contractor collapse, provided it is made before it is too late, and the only option left is liquidation.
The most tried and tested ways to turn around a struggling contractor at risk of becoming insolvent are to:
Explore refinancing options: Distressed firms will typically have borrowed money to tide them over. Provided they are earning sufficient revenue, they may be able to renegotiate their debt repayments to reduce the pressure on their cash flow, giving them time to get their finances back on track.
Find a buyer: Companies with future growth potential and assets can be attractive to buyers, even if their cash flow is stretched right now.
Novate the company’s contracts: It may be possible to transfer some of the company’s contracts – including both their obligations and rewards – to another firm, leaving the contractor slimmed down and with lower liabilities.
There are signs of what is to come for the Irish construction sector from what has happened over the past year in the UK as government supports have been eased out. For 2021, 19% of all insolvencies in the UK were in the construction sector, and it is also expected to be the leading sector for UK insolvencies for 2022.
As Exchequer supports and concessions wind up, with creditor forbearance no longer available and the impact of spiking costs being felt, many financially weak companies will be brought to breaking point. We expect that in the 12 months from June 2022 to May 2023, between 1,000 and 1,500 Irish companies will go into liquidation. Based on trends from the UK, this could see up to 300 companies in the Irish construction sector being wound up.
The domino effect outlined above will also have an impact on the number of construction insolvencies in 2022 and 2023. The recent receivership of Roadbridge is likely to have a major impact on many of its sub-contractors. We have seen examples of this in the recent past when the liquidation of a major UK construction company, Carillion, had a domino effect on Irish sub-contractors, with Salmon Contracting initially appointing an examiner and subsequently going into liquidation. In a previous article we outlined the lessons to be learned from the Carillion UK collapse.
Rather than letting matters run too far, companies who foresee a tight and challenging cash flow position should bring in outside experts, as early intervention can save some or all of the business. For many, the current situation is likely to be exacerbated by the impact of certain concurrent projects which are loss-making, and an early solution to renegotiate or abandon these projects is vital.
For those companies at the point of insolvency, we can still look at options to put the company into examinership or use the SCARP process to create breathing space to communicate, settle monies owed to the most pressing creditors and formulate a rescue plan.
In our experience, no two restructuring plans will be the same, as each struggling business will be facing a unique range of issues which will need to be unpicked and systematically tackled.
To best help the most fragile companies get back from the brink, we emphasise three things –act early, act decisively and seek expert advice. Our analysis will most likely show that the businesses have a viable core component worth saving, and this exercise will be less painful and less costly than shutting down and starting again.
If you or your company have been affected by liquidation, are having cash flow issues or wish to speak to someone about restructuring your business, please do not hesitate to contact our restructuring and insolvency team for a confidential consultation.