If Fletcher Building remains in a trading halt until Monday, the results may be "pretty ugly", says shareholder advocate Bruce Sheppard.
Fletcher Building said this morning that it expects further losses at its troubled building and interiors (B+I) business after two downgrades last year and expects to be in breach of its banking covenants once the losses are quantified.
As at June last year, the country's largest construction business owed $2.17 billion.
Its stock and capital notes were halted this morning pending a review of B+I projects.
That trading halt will remain in place either until it releases the review, or when the share market opens on Monday morning.
The company's shares last traded at $7.77 apiece, down 23.15 per cent on this time last year.
"Although the project reviews are not yet complete, 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," the company said this morning.
"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."
In October, Fletcher chair Ralph Norris apologised to shareholders for the company's mistakes as the company took a further $125 million provision against problematic construction contracts including the International Convention Centre in Auckland and the Justice Precinct in Christchurch and said its B&I unit would report a full-year loss of $160m.
Losses on the Convention Centre and the Justice Precinct accounted for about two-thirds of the $292m loss recorded for B&I in 2017.
Fletcher's 2018 full-year earnings guidance, excluding B+I loss, is $680m to $720m, suggesting full-year earnings including B+I could be as low as $520m.
Fletcher Building's half-year result is due out this month.
Shareholders Association founder Bruce Sheppard said that if the trading halt remained in place until Monday, that signalled the situation would be "pretty ugly".
"When it's a longer trading halt the signal is 'we've done enough work to know we've got a problem, we just don't know how bad or good it is, we now need time to narrow the range of possible outcomes to the most probable outcome," he said.
Sheppard said the prospect of further losses at Fletcher Building didn't surprise him.
"Generally when a train starts running downhill it takes a really long time to stop," he said.
Assuming that the company had dealt with its systemic issues, they had to now work to isolate other problems.
Sheppard saw the company as having two options to treat this sort of "ulcer": "treat it with sulfur or cut the leg off".
"My take is they will continue to lose money on those projects until they finish them and they've got two basic choices: quarantine them and basically cap their losses through negotiation and/or structural change, which will have a legacy brand impact on them, or do what it takes to get the damn things finished and off their books as quickly as possible," he said.
This second of these options would involve pouring more resources into individual projects, hiring people offshore, and taking their best management and assigning them to it.
"And the problem with [that] is you have to gut your core businesses to get management focus on it and you end up drifting and losing market share," Sheppard said.
Matt Goodson, managing director at Salt Funds Management, said this morning:
"Given the nature of those banking covenants - net debt to ebitda - and given that they will be taking most of the construction losses in the 2018 year - that will tip them, presumably, into breach," he said.
Talks with financiers could lead to a waiver of banking covenants as long as Fletcher Building provided a clear path towards fixing the problem.
"These are the things that we will find out on Monday."
"Presumably they need to definitively pin down the numbers with the bankers whose covenants have now been breached," he said.
Goodson said a capital raising for Fletcher Building was a possibility.
"I'm not sure if it's likely but it would be possible - it totally depends on the size of those losses," he said.
Shane Solly, portfolio manager and analyst at Harbour Asset Management, said investors would be disappointed and would want a lot more detail from the company.
"Whenever a company breaches its banking covenants, it's an important event," he said.
Although he was waiting for more detail, National's finance spokesman Steven Joyce said he would be concerned about any further pressure on the construction market.
"Say, for example, the Government constraining migration or confusion around their KiwiBuild programme … it's important we don't treat the construction market as a given because actually we do need that to continue growing both in terms of commercial building and in residential areas."
- additional reporting: BusinessDesk