'Calm before the storm' - Insolvency Today Roundtable
- Date: 12/11/2012
With a predicted increase in the number of insolvencies in the property and construction sectors over the coming months, Insolvency Today asks the industry what we should expect.
JOE MCGRATH, Insolvency Today
CHRIS LOERNS, BLP Insurance
BRIAN KILROY, BLP Insurance
NIGEL SHILTON, Deloitte
VINCE ROLAND, Naismiths
HELENA PENNYCOOK, Pennycook Consultancy
JOHN PAYLOR, Guardian Business Recovery LLP
RICHARD NICOLL, Reed Smith
Q - Joe McGrath (JM): Where are the notable areas of concern within the construction industry right now?
A - Nigel Shilton: On the face of it, construction companies are looking okay but get behind it and it is the cash flow that is the problem. The problems that were stored up between 18 months and two years ago by low bidding are starting to come through. People are talking about great or better-than-average “profits” but what we’re seeing is that a lot of the time operating profit is not necessarily linked to cash because it is locked up in claims which can lead to wide variations. I think what you will start to see is that we are heading back to this old claims culture and it is starting to bite. I think we are anticipating a lot more insolvencies coming through and it is all from a cash flow perspective. It started again a couple of years ago. A lot of contractors are beginning to realise that they just can’t continue to go in and take on those margins and so general prices are starting to increase. There has been a realisation that you just can’t keep going in ‘low ball’ and hoping to make up the margin through discretes and variations. If you go back to the early 1990s and look at what was happening then, it was a similar situation. Just look at companies like Jarvis.
A - Chris Loerns: Nobody has got any confidence at the moment. I think everyone’s just hunkered down; they have battened down the hatches and don’t want to take any risks. They can’t afford to go back to the banks to ask for money because it sends out the wrong signals – certainly on the contracting side.
Q - JM: What is the attitude of banks at the moment towards financing rescue and turnaround deals in the property and construction sectors? Does the region in which the case happens to be make a difference to the overall outcome?
A - Helena Pennycook: It is more based on the business case. The problem is that the prices in the regions have dropped so much more and the appetite for purchasing in the regions is so much less. But it goes to the business case rather than the funder simply saying “we don’t like Newcastle”, or whatever.
A - Nigel Shilton: Yes, I’d agree with that. I mean, it’s not one that we were involved with but another insolvency practitioner (IP) in Manchester. There was a city centre apartment scheme in Manchester where it actually made sense to build it out. The fIP has since gone forward and the development has been very successful. In terms of what it is and where it is, it really does just come back to the numbers and the potential within the recovery.
Q - JM: How would you describe the property insurance landscape in the current market?
A - Chris Loerns: I can give you a clue as to where the market is at the moment and it’s
rock bottom. In insurance terms, no one is making a single penny on construction.
I spent Tuesday with the London market construction underwriting team and “it’s
burning its arse off” was the comment. They need to lose about 25% capacity
because everybody’s undercutting everyone else. The insurance landscape at the moment is rock bottom pricing, wide cover and paying out too much in legal fees.
Q - JM: There has been some discussion about the actual value of collateral warranties of late. Do you think there is a more suitable way of insuring in distressed schemes?
A - John Paylor: Many of the products on the market today are used just for a compliance tick box.
A - Richard Nicoll: One of the reasons banks want collateral warranties is it gives them the assurance that they will be in a position to step in and get the works finished if something goes wrong and they choose to carry on funding the development. In the short term, there are loads of examples of that being exercised. But you need to ask, has somebody ever enforced the warranty because the cladding falls off or the air con doesn’t generate the right temperature over the longer term?
Q - JM: So what are the alternatives and is there a need for an education job for alternative products?
A - Richard Nicoll: Education is a difficult task. In the commercial market, you are very much fighting against conventionality. Property and construction generally is a pretty traditional sector and getting people to change their views is very, very hard.
A - Nigel Shilton: I think the insolvency market is a little different, though. It is probably a little more advanced. If we’ve got an issue and there is a company offering the right policy to protect or enhance, we will use it. And we have done. A lot of institutions have started to understand that as long as their policies are robust from a robust insurer, there is some value. If a financial institution standing behind the policy is robust and the policy works, you would consider using it.
Q - JM: Which organisation or industry working groups are best placed to take on responsibility for the education of alternative insurance products within the distressed sector?
A - Chris Loerns: You’ve got the Association of Property Brokers, Royal Institution of Chartered Surveyors, Institute of Civil Engineers, then R3, which is moving into the insolvency market, but we don’t get representatives from the wider insurance industry coming to say: “This is what the insurance industry is doing for IPs in the property sector.