The failure of the contractor group occurred because of rising tariffs, cost pressures, stalled COVID-19 supply chains, and more active ATOs starting to hit the business sector.
The collapse of South African-owned and Western Australian-based engineering contractor Clough Group will have serious consequences for some of Australia's biggest infrastructure projects, including the hydropump Snowy 2.0 project and the much-vaunted Inland Rail project.
But this was a slow-moving train wreck that surprised no one in the contracting or bankruptcy sector.
Clough's owner, registered South African group Murray & Roberts, announced it wanted to go out of business in October, citing typical problems that have plagued the contracting and construction business in the past 18 months: fixed price contract clashes and COVID-related disruptions, which made it difficult for Clough to complete work. and collect payment.
Murray & Roberts managed to find a way around this, striking a deal with Italian group Webuild, with whom Clough had worked with several projects, including Snowy 2.0. Under the deal, the Italians paid only $500,000 and wrote off $250 million in debt.
But on Monday night, the deal fell through – apparently by mutual consent – and Clough was handed over to administrators from Deloitte.
Exactly what can be saved here, and what effect the flow will have on Clough's order book, remains to be seen. But the episode once again underscores what this column has previously described as a broken system of fixed price contracts.
This model only gives the project developer the illusion of risk management. In reality, fixed price contracts only push risk to one party – and everyone loses when the risk presents itself.
The pressure is rising
For Jason Preston, chairman of McGrathNicol, Clough's collapse will be a familiar story. While the government's stimulus efforts have made the last three years pretty quiet for the bankruptcy sector, activity is starting to heat up as the economy slows.
Preston said the contracting and construction sector had been the hardest hit – drunk on fixed price pressures from COVID-19 – but pressure was now building more broadly as a result of rising interest rates, cost pressures, ending government support measures and the fact the Australian Tax Office was charging debt again after the pandemic break.
“You actually have most of the macro factors that are hurting the business in a lot of ways right now,” said Preston.
The latest addition to Preston's bankruptcy watch list is another “C” – crypto.
The contagion from the collapse of crypto exchange FTX has reached Australia and Preston said his company has seen an increase in directors of crypto-related businesses assessing their options, especially in light of the so-called safe harbor provisions that have allowed struggling companies to formulate plans. to trade through the chaos.
"We're seeing businesses looking for safe harbor support as they try and figure out what that means to them and what's going to happen over the next few weeks and months in that space."
Pullbacks appear
Looking to the year ahead, Preston is watching two halves of the economy very closely.
The first is retail. While consumer spending has held up well even as interest rates have increased over the last seven months, Preston said the crucial Christmas trading period will be a big test of consumers' willingness to keep spending in the face of cost-of-living pressures, and the ability of retailers to manage through a marked period. with high inflation and continuous supply chain disruptions. As the dust settles in January and February, the pain in the retail sector could intensify.
Preston is also keeping a close eye on changes in liquidity in local markets, as lenders and investors start to become a little more cautious about the macroeconomic environment. He said last week's announcement that Blackstone was limiting redemptions to US real estate funds was an interesting example of some of the pressure he had recently seen.
“If I think back to 2007 and think about what was the setter last time, it was actually liquidity. You saw that almost before we all realized what was going to happen with GFC. I think the big question for the next six months will be around liquidity." I think we're probably coming to a period of time now where people are a little bit more careful.
—Jason Preston, McGrath Nicol
To be clear, lenders of all descriptions – major banks, specialist business lenders, and private credit markets which have exploded in size in recent years – are still active. And in the mid-range markets where McGrathNicol is focused, merger and acquisition activity has remained quite strong.
But Preston saw signs of decline emerging.
“In a world where maybe six to 12 months ago lenders didn't want to pass up transaction financing because it was so competitive, I think we're probably coming to a period of time now where people are a little bit more careful. That will affect transaction speed and potentially impact valuation.”
Ironically, the first increase in activity for the bankruptcy sector in three years came as parliamentary committees began reviewing industry regulatory and policy arrangements.
McGrathNicol has made submissions suggesting some smaller short-term tweaks that could help remove costs from the bankruptcy proceedings, but Preston's main call is for a broader root-and-branch review of Australia's bankruptcy arrangements, which have remained largely untouched since the 1980s. an.
“Australia is seen and is currently defined as a very creditor-friendly environment. It had some positives in terms of encouraging private credit from abroad, encouraging lenders to be more willing to lend money, but our process compared to other processes around the world is very creditor-friendly. This article was written by EDUKASI CAMPUS.