Vincent Sorohan, Director, Real Estate Advisory, Deloitte Ireland, sets out some of the steps that those operating in the construction sector need to take to reduce or recoup losses accrued as a result of the Covid-19 shutdown.
As the impact of Covid-19 is felt around the world, the primary focus of the construction sector will mainly be on-site operations and ensuring that the correct health and safety protocols are in place in advance of the return to operational ‘new’ normality.
In this article, we highlight some of the financial implications of the pandemic for those operating in the construction sector; what steps need to be taken now; and, what steps can be taken in the near future to ensure a reduction and recuperation of ongoing losses.
Financial Issues You May Be Facing Now
Construction is a sector where margins are traditionally tight, and cashflow is of paramount importance. Covid-19 has had an immediate and unforgiving impact on both financial measurements. So, understanding and taking the right steps from a financial planning perspective can ensure that inevitable revenue, working capital and funding challenges are mitigated now.
– Reforecast trading and cashflows: Ongoing reviews of projections for the remainder of 2020 should be undertaken. This will allow companies to implement actions to preserve cash in the short- to medium-term until such time as any effects to operational new normality have become clear.
– Complete a scenario analysis: Understanding both actual and potential financing needs is critically important. Companies need to test and challenge all assumptions and run downside scenarios to give themselves clarity. This will also help highlight whether any specific restructuring expertise or advice is required.
– Review lending documents: Companies should ensure that they have a clear understanding of the key terms, covenants, headroom, and any flexibility in existing banking and financing documents. If in any doubt, they should consult their accountant or legal advisor.
– Proactively engage with funders: Forecasts may indicate a potential breach of financial covenants. By proactively engaging with funders, businesses can look to negotiate covenant waivers or covenant resets, helping to prevent any breach. • Identify additional sources of capital: Should cashflow forecasts suggest that liquidity is or will become an issue, companies should assess options for raising new funds, including arranging temporarily larger facilities, introducing new equity, or considering asset-based financing.
– Demonstrate ability to recover: It is, of course, important to demonstrate to funders the ability of the business to return to something approaching its original underwrite within a reasonable period of time. It may be helpful to consult an accountant with regard to this.
Once a company has considered all of its options from a financing and operational standpoint, there are some other avenues available should financial difficulties remain.
All businesses wish to turnaround their fortunes and avoid a terminal insolvency situation in difficult times such as this. There are several restructuring options available to companies to avoid such a scenario including:
– Examinership – A very effective tool to allow companies to obtain a period of protection from its creditors, seek fresh investment in the business, and propose a restructure of its overall balance sheet.
– A Part 9 scheme or arrangement – A similar process to examinership that has the advantage of lower costs. But, it has a higher bar for creditor approval. It is designed to allow a company restructure its debts or one class of its creditors.
– A managed exit from the business – This entails a further options analysis to consider areas to fix within the business. This analysis could take the form of a potential carve-out or sale of an underperforming segment or whole of a business, or a controlled closure of the company.
Company directors have a duty of care to ensure they do not trade while insolvent, and there are a range of insolvency processes available to companies as a last resort and where all other avenues have not driven a recovery.
A Future State Of Readiness For Disputes
While the immediate worry will be remaining solvent and in business, there is also a need to look to the future and the possibility that contractors could end up in complex disputes with clients and suppliers following the period of suspension of most construction across the country.
It is important that companies are thinking ahead, to be in a state of readiness to resolve any contractual challenges or navigate contentious scenarios, to protect the future of their businesses, and to preserve important commercial relationships.
Set out below are key considerations for companies across the entire spectrum of the construction sector, be that contractors, design professionals or other professional advisors, in terms of protecting future business.
– Failure to meet contractual obligations: Check whether your contract allows for the impact of an ‘uncontrollable factor’ or ‘force majeure’ to be taken into account. Communicate your legal understanding of this clause with your client to ensure initial engagement is on record.
– Insurance cover: Review whether you have applicable insurance coverage to take into account business interruption or credit risk arising from, for example, the loss of a key supplier. Is it currently enforceable in the current environment?
– Review your supply chain: Has the impact of Covid-19 created or exacerbated a contractual under-performance of one of your suppliers? Does the contract set out specific performance metrics that a party is already breaching or at risk of breaching? Communicate your legal understanding of the performance with your supplier to ensure initial engagement is on record.
– Quantify your losses: Consider whether you are able to take mitigating actions to reduce fixed and semi-permanent costs. Ensure you avail of the Government relief schemes, where relevant. Accurately capture all associated internal and external costs and losses incurred to be in a state of readiness for dispute resolution.
– Get ready for new alternative dispute resolution options: Traditionally, the speed of dispute resolution has been slow, and the cost of disputes tend to be high. With the growing use of online dispute resolution, technology is increasingly becoming prominent in ensuring speedier resolutions using portal-based video conferencing/electronic chat or asynchronous forms of communication such as email. Ensure that you are set up to take advantage of online dispute resolution, as this will be the quickest way back to the new normality.
It can be a daunting task to make sense of the current environment and keep abreast of all the information needed for you to make informed choices.
It is therefore wise for companies and individuals with links to the construction industry to review all of the steps and measures set out in this article to ensure that costs and losses are minimised, while also making certain that they have identified all mechanisms to recoup losses and recover a healthy and safe trading future.
Vincent Sorohan is a Director in Deloitte Ireland’s Financial Advisory team and leads the Real Estate Advisory Services. For more details, visit www.deloitte.com/ie