Construction firms challenged as business shrinks, cashflow hit

Razor-thin margins appear to be Achilles heel; but new legal developments hold out hope for smaller companies facing insolvency


THE beleaguered oil and gas industry has barely started to climb out of the hole when another major business sector - construction - is headed for dark times, with increasing liquidations and collapses.

Backed into a corner by a shrinking market and cashflow gap, at least 20 construction and engineering firms were involved in winding up applications in the third quarter (July to September) alone, according to a count by The Business Times.

Corporate lawyers say that despite the recent property en bloc boom, more builders - especially small and mid-sized ones - have been struggling to stay afloat amid a liquidity squeeze and mounting debt as the sector continues to languish.

Justin Yip, partner, Withers KhattarWong, said: "In the last few years, we have seen an increase in small and mid-size construction companies getting into financial difficulties, resulting in filings for judicial management, liquidation and appointment of receivers over their assets."

And things will only get worse before they get better. Lawyers point out that the derailment of the High-Speed Rail (HSR) project and further property cooling measures announced in July - which effectively ended the en bloc party - would exacerbate the sector's pains.

Spring Tan, also a partner at Withers KhattarWong, said this "double whammy" will affect both engineering and construction firms, and the impact is likely to be felt in 2019.

"As the pie gets smaller, small construction firms will feel the need to bid lower at tenders, even at or below costs, in order to win the bid," she explained.

"The danger will be when, or if, the main contractors, or contractors higher up in the food chain collapse, then the smaller construction firms will have difficulty keeping afloat."

Since margins are thin for small builders, any delay or disruption in the project, or movements in costs of labour and materials, will have a significant impact on the construction companies' cashflow.

This will result in work slowdowns that could lead to firms being terminated and a call on its performance bonds for the particular project, said Daniel Tay, partner, Chan Neo LLP.

"With mounting debts, the small firm potentially faces liquidation," he added.

Some construction companies that have been in the spotlight of late include mainboard-listed ground engineering solutions firm Ryobi Kiso, which is undergoing a court-supervised re-organisation of its liabilities following letters of demand from various creditors for sums totalling millions of dollars.

Another firm in liquidation is tunnelling contractor Tactic Engineering, whose performance bond got called by main contractor Sato Kogyo, on the back of debt difficulties and payment disputes. It went to the Court of Appeal earlier this year to dispute the call.

But from his experience, Mr Tay said that debt restructuring - either via judicial management or a scheme of arrangement - is "not a typical step for an SME contractor" as it could be difficult to convince creditors to approve restructuring. It could also adversely affect the operational credibility of the contractor and it would be hard-pressed to recover financially.

Those which attempt restructuring tend to be "the more sophisticated type" of contractors which have the resources to hire lawyers to advise on the process, he added.

For construction SMEs facing liquidity issues from delayed payments further upstream, one option that small builders prefer to turn to is adjudication under the Building and Construction Industry Security of Payment Act (SOP Act).

This is often utilised rather than the longer and more expensive process of litigation or arbitration, as a binding decision can potentially be issued within the month, said Mr Tay.

But some recent changes in the legal space aim to give small builders some respite amid the dismal climate.

With the US Chapter 11-styled insolvency laws introduced last May and the new Insolvency, Restructuring and Dissolution Bill introduced in September this year, Withers KhattarWong's Mr Yip said that there is now greater emphasis on debtor protection and corporate rescue.

Features such as rescue financing, automatic 30-day moratorium and restrictions against enforcement of security, and restriction against the operation of ipso facto clauses "will give these failing construction SMEs valuable breathing space and a better chance of survival", said Mr Yip.

Ipso facto clauses entitle a party to unilaterally terminate or modify the contract upon occurrence of a trigger event.

On the new Insolvency, Restructuring and Dissolution Bill, Chan Wei Meng, Director, Corporate Restructuring & Workouts, Drew & Napier, said: "Construction companies undergoing restructuring that have ongoing contracts would likely benefit from the new provision."

The new provision would facilitate debt restructuring via a scheme or judicial management, and reduces the disruption to businesses of the company while undergoing the process, he added.

Despite legal developments that aim to lift the sector, the issue remains that slow payments continue to dog the construction industry.

According to data from the Singapore Commercial Credit Bureau (SCCB), there has been an uptrend in slow payments by construction firms in the past few years, which rose from 44.3 per cent in 2015 to 52.63 per cent in 2017.

Slow payments accounted for more than half of total payment transactions.

In the near term, observers continue to be pessimistic about the sector's outlook.

Matthias Chen, Assistant Director - Marketing, Strategy & Innovation, SCCB, said: "The construction sector will see sustained weakness for the rest of the year due to muted activities within the public building segment."

As for Withers KhattarWong's Ms Tan, she believes that it is "likely to get worse before it gets better" for small builders, thanks to the suspension of the HSR project due to start in 2019, and the recent cooling measures that affected new en bloc developments.

"The situation in the longer term will likely improve for those with healthy cashflow or deep pockets as counter measures or new projects are likely to be announced when the situation worsens," she said.

In the meantime, in order for construction SMEs to stay afloat, SCCB's Mr Chen advised firms to exercise "greater credit vigilance" by achieving a better balance between their suppliers and clients' terms of payment. This would specifically mean reducing the number of floating capital days which would minimise the probability of entering into financial distress, he said.

"Construction firms should continuously review their credit policies as the risk standing of their business partners may change over time," he said.

"Firms within this sector are particularly susceptible to such adverse changes… it would be prudent for them to conduct regular due diligence and tighten their credit terms when necessary."

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