Dubai: The UAE’s once mighty construction giant Arabtec is all set to be broken up. It sure looks that way.
On Sunday (March 21), the parent entity – Arabtec Holding – submitted a bankruptcy petition with the Dubai Court. Not just that, four of its subsidiaries too are going through the process - Arabtec Construction llc; Austrian Arabian Readymix Concrete Co.; Arabtec Precast; and Emirates Falcon Electromechanical Co..
But what’s missing from this mix is just as interesting – Target Engineering Construction Co. and Arabtec Engineering Services. Target, which is Arabtec’s specialist subsidiary for the oil industry, remains active on the project front, and as recently as November picked up a $38 million contract in Saudi Arabia. It also owns and operates marine vessels.
Which would make it interesting for any entity wanting to buy up Target. And this subsidiary could well be the first to be hived off from Arabtec as part of the long process that bankruptcy typically is.
“Arabtec had hired Lumina Capital and Denovo to manage the sale of Target and Arabtec Engineering Services,” said Sameer Lakhani, Managing Director at Global Capital Partners, a consultancy. “It’s because of the underlying value of their assets and its monetizable value that have been excluded from the bankruptcy and insolvency process for now.
“Any such sale were it to transpire would have to be ratified as required by UAE laws.”
An application to add two other entities - GSI Steel Construction Contracting and Gulf Steel Industries – to the proceedings are pending.
"Shares in Arabtec Holding were suspended on October 1, 2020 and the last traded price was Dh0.53," said Vijay Valecha of Century Financial.
"The highest price at which Arabtec ever traded was Dh30.05 - in May 2014 - while the lowest price was Dh0.44 in March 2020. Deteriorating economic conditions triggered by the coronavirus pandemic, property oversupply and weak growth prospects contributed to its demise, along with corporate governance lapses."
Fall from the top
For heavily indebted Arabtec, all of this is far removed from the time when it was busy building the Burj Khalifa and some of the other landmarks that dot the UAE. Having Arabtec as the contractor for a project was as much a sign of prestige as the actual development itself.
The move to liquidate followed a first-half 2020 loss of $216.18 million and total accumulated losses of nearly $400 million
Now, bankruptcy is the only option left for the company that is struggling to pay off its lenders, sub-contractors and, according to some of its employees, even staff salaries. But sources add that government ministries and associated departments are monitoring staff payment processes to ensure Arabtec meets these obligations.
Testing revised Bankruptcy Law
Arabtec will also be testing the recently revised the UAE’s Bankruptcy Law, which among other things, provides more scope for the affected business to seek ways to emerge from a crisis. In particular, the revised Law allows a 12-month period during which all possible options can be attempted.
But will those 12 months be enough for Arabtec?
“The amendments to the UAE Bankruptcy Law were mainly concerned with the consequences as a result of the pandemic, force majeure, etc., towards the process of liquidation,” said Hesham Elsamra, Senior Associate at Abdulla Alawadi & Associates. “And how creditors and debtors would be brought under a solid umbrella for the finalization of the liquidation.
“For instance, the mechanism of settlement of due debts is based on mutual understanding between creditors and debtors, for which the later shall be provided with a grace period of not more than 12 months to settle.”
Court gets to oversee
Having formally placed itself for bankruptcy, the Dubai Courts will now decide the course of action.
The bankruptcy judge has appointed an experts’ panel to look into the bankruptcy application. The panel will now prepare “separate reports” for each of the subsidiaries in addition to a consolidated report on the holding company. The panel members will evaluate its “financial position and whether it’s considered indebted, and the possibility of restructuring,” according to Arabtec.
What brought on the crisis?
"Arabtec’s total liabilities at the end of June last was about $2.75 billion (Dh 10.14 billion), which included almost $500 million in bank borrowing,” said Vijay Valecha, Chief Investment Officer at Century Financial. “The move to liquidate followed a first-half 2020 loss of $216.18 million and total accumulated losses of nearly $400 million.
“Some of the top lenders include Mashreq Bank and Abu Dhabi Commercial Bank, among others.”
The fear, at least among some in the industry, is that the size of what it owes could be even bigger. Arabtec is expected to provide a full accounting soon.
Too fast, too big
The question always gets asked how could a construction company that built the Burj Khalifa, and more recently the Louvre Abu Dhabi – a $653 million contract – mess up so badly to be in its current position?
According to a senior industry source, the answer is simple enough – Arabtec wanted to grow bigger way too fast. “It created too many subsidiaries, went into too many new markets at the same time, took on too many projects in its home market at the same time,” he added.
“Some of its pricing on projects were awry too – the pricing now is no way similar to what was there five years ago. But Arabtec was slow to react in many ways.”
The accumulated losses and the size of the debts shows how wrong some of those missteps turned out to be.