NZX and ASX-listed giant Fletcher Building is due to reveal to the market tomorrow the true extent of its difficulties, after warning last week that it was in danger of breaching bank lending covenants and remaining frozen in a six-day trading halt.
Whether tomorrow turns out to be a sackcloth Ash Wednesday or a celebratory St Valentine's Day for shareholders in the business with a $5.1 billion market capitalisation remains unknown.
But it seems more likely to be bad, given Monday's cancellation of a briefing, in advance of its December 31 half-year result due out on February 21, revelations of the bank talks and trading halt extensions.
Read more: Fletcher Building investors worried
Fletcher got an NZX trading halt last Thursday, simultaneously suspending ASX trading, saying it was "reviewing the key projects in its Building and Interiors business. The current expectation of the board is that there will be further material losses in the B+I business beyond what was provided for in October 2017. Once the extent of those further losses is determined and provided for, it is expected that this would result in a breach of one or more of the covenants in the group's financing arrangements."
Matt Goodson, managing director of Salt Funds Management, said today: "The outlook is more important than the half-year. The key things for the market to get comfort around are the extent of losses in the construction division and whether they really have seen all of them and also the outlook for the New Zealand residential division, given that the housing market appears to have peaked in Auckland."
Another market participant suggested a four-fold plan which might not please many shareholders.
"Fletcher must restructure its debt. This is a debt structure problem in the first instance – so resetting the terms of the offshore bond issue is key.
"Fletcher must also cut the dividend paid to shareholders. This will give wiggle room to work on other strategies. It has to sell assets and businesses, and only then raising new equity capital," he said.
His comments follow predictions from Mark Lister, head of private wealth research at Craigs Investment Partners, that shareholders might be asked to bail it out of its debt issues.
"The worst-case scenario we might see is having to raise capital. Shareholders might be asked to put money into the company, which would mean the share price comes down. Fletcher might have to do a rights issue, so shareholders might have to tip some money in. That's the worst it could get to," Lister said this week.
Anthony Leighs, managing director of Leighs Construction with $500m of work on, said today he was not surprised by difficulties in businesses like Fletcher, as the building sector faced many challenges.
"I don't have intimate knowledge but on the basis of the nature of some of its projects, it's very easy for costs to escalate well beyond budgets. A lot of that is due to fixed price contract work that's only partially designed. It's one of the causes of the industry struggling at the moment," he said, adding that many public sector head contracts were let on this basis.
Read more: What's happening at Fletcher Building?
Last month, the United Kingdom's second-largest construction company, Carillion, announced that it would go into compulsory liquidation. The listed business has about 43,000 employees, with around 20,000 of them in the United Kingdom.
Fletcher Building has more than 18,000 employees, is New Zealand's largest builder and has around $2b of debt. Further profit downgrades are possible tomorrow, the company hit by losses from two big jobs - the NZ International Convention Centre in Auckland which is only partly built and Christchurch's Justice and Emergency Precinct, which opened last year.
Read more: Fletcher Building trading halt extended
Chris Hunter, the chief at Auckland-headquartered builder NZStrong, and Tony Maginness, a director of accountant and insolvency specialist Staples Rodway, have warned of many risks to the sector.
Leighs said construction was running at unprecedented levels and this was a potentially dangerous time.
"We've seen Fletcher in a spot of bother, Hawkins sold and international companies from Asia and Australia coming here. There are significant challenges which are not good for the industry because they suck capital out when big losses are incurred," Leighs said.