Why the Alarmists are seeking a new El Dorado
The golden age is long over for Europe’s construction companies. In the wake of the longest recession of the postwar era, their two largest sources of finance — governments and banks — are either unable or unwilling to spend or lend, leaving many once-thriving companies on the brink.
New Market Rigging Scandal Tangles Up Already Teetering Construction Giants in Europe
by Don Quijones • Oct 17, 2018 • 19 Comments
Italian and Spanish construction companies with global projects on the brink or over the brink.
By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.
The golden age is long over for Europe’s construction companies. In the wake of the longest recession of the postwar era, their two largest sources of finance — governments and banks — are either unable or unwilling to spend or lend, leaving many once-thriving companies on the brink.
Last July, the Spanish building firm Isolux Corsan declared bankruptcy, leaving 3,884 workers and 119 global construction projects in the lurch. Seven months after its collapse, the bankruptcy receivers announced that the group’s total had €4 billion more in debt than previously disclosed.
At the beginning of this year it was UK outsourcing giant Carillion to file for liquidation after failing to secure a government bailout, leaving bank lenders and bondholders holding a bag containing 1.6 billion pounds ($2.1 billion) of virtually worthless debt.
This is one of the inevitable problems that arise whenever a large construction firm collapses: It leaves large holes on banks’ balance sheets. Banks in Italy are owed €102 billion by the construction industry, which accounts for the highest default rates in the country, reports Bloomberg. With Astaldi SpA readying plans to restructure as much as €2.5 billion of debt, three of the top six Italian builders are now either insolvent or negotiating with creditors.
In Spain one company that is setting off alarm bells is the debt-laden, scandal-tarnished OHL, which is on the verge of becoming a penny stock after its share price plunged nearly 80% year-to-date, about half of it over the past six months, to €1.24 on Wednesday. Four years ago, the shares were worth €17 a piece.
The firm’s problems began in earnest in the first half of 2016, when it reported its worst ever half-year results. OHL’s profits shrank 94% during the six-month period, leading to the firm’s removal from Spain’s benchmark index, the IBEX 35, due to insufficient capitalization.
One of the biggest factors in the company’s decline was its steady loss of international contracts. Since the collapse of Spain’s real estate sector in 2008-09, opportunities for large construction firms in the once-abundant home market had run dry. The ability to survive the new reality hinged on firms’ ability to carve out new opportunities abroad. This is something OHL excelled at, winning prestigious construction and infrastructure projects all over the world, from Montreal to Mecca, from Mexico to Manila.
But by 2016 things had soured, particularly in the Middle East. Qatar terminated a contract worth €1.1 billion for the construction of two metro stations in Doha, citing an apparent “failure to fulfill certain contractual obligations.” OHL was also closely involved in the initially highly prestigious but ultimately financially disastrous project to build a high-speed rail line from Medina to Mecca, which was finally inaugurated last month, six years behind schedule.
The company also faced a bribery and price-rigging scandal in Mexico, one of its most lucrative markets. At one point it paid lawyers and auditors from all of the “Big Four” firms — Deloitte (its long-time auditor), KPMG, PwC and Ernst & Young — to vouch for its innocence. That didn’t stop Mexico’s securities authority from finding the company guilty of a series of violations of stock market laws and slapping the firm with the biggest fine in its history.
To provide some respite to its creditors and shareholders as well as keep the bailiffs off its back, OHL has pawned many of its most valuable assets, including its concession unit to the Australian investment fund FMI. But the bleeding continues.
At the end of September it reported shrinking sales and revenues for the first half of this year as well as losses of €843 million, due largely to cost overruns across a number of projects as well as the loss of its highly profitable concessions business. On that day its shares plunged 23%.
And the financial pressures continue to mount. In September Credit Agricole, Santander, HSBC and Deutsche Bank kindly reminded Grupo Villar Mir, the family business that owns 51% of OHL’s shares, that the company has short-term debt obligations worth some €500 million. Shortly after, the company was in contact with China State Construction Engineering, one of the world’s largest contractors, over potentially selling a stake.
But even that desperate ruse may have been nipped in the bud by the emergence last week of another major scandal implicating OHL. On Thursday, Spain’s National Market and Competition Commission accused the company of colluding with six other major construction firms, Acciona, Corsán-Corviam (part of Grupo Isolux Corsán), Dragados (ACS), (Carlos Slim-owned) FCC, Ferrovial, OHL and Sacyr, to rig the bidding processes for major public projects throughout Spain.
Following a series of inspections, the watchdog believes “there is compelling evidence” of the existence of “agreements and information sharing” between these seven construction firms with the goal of “restricting competition” in public tenders for the construction and rehabilitation of infrastructures and buildings.
Given the mind-boggling scale and scope of the corruption unearthed in Spain in recent years, the fact that seven of the country’ largest construction firms now stand accused of operating an informal cartel that made it much more difficult for smaller, less connected firms to compete for public tender projects should come as little surprise.
It’s not clear what the eventual outcome of the investigation will be, or what kind of punishment, if any, will be meted out if the seven companies are found guilty. But for OHL, a company so close to the brink of financial collapse and desperately trying to attract outside investors in order to keep servicing its debt, the added uncertainty and reputational damage resulting from the new scandal may well be punishment enough. By Don Quijones. |
