Dubai: The rush will start now… as subcontractors, suppliers and others file claims against UAE construction giant Arabtec to recover whatever is owed to them. Or as much of it as is possible as Arabtec files for liquidation with a local court at the earliest opportunity.
For the subcontractors, in particular, the coming weeks will be extremely crucial as their very survival is at stake. Some have already prepared multi-million dirham claims against Arabtec – or those Arabtec subsidiaries they are associated with – and which will be filed once the formal liquidation move is initiated at a local court.
It was in September that Arabtec confirmed it can no longer remain operational after sustaining heavy losses in the first-half of this year. The company had tried multiple options over the last five years to recover its financial footing, but the scale of the accumulated losses finally proved terminal.
Arabtec's liabilities with banks and creditors are reckoned to be well over Dh10 billion.
“Smaller subcontractors will go out of business if they are not going to recover what they are owed for work that’s been done,” said the owner of a subcontracting firm that had worked with Arabtec in the past. “Some have already ceased operations.”
Arabtec’s immediate plan
Late on Monday (November 30), Arabtec issued a statement that it will formally enter liquidation. And added, “The Board has concluded that it is no longer tenable for the company to continue operating outside of a formal insolvency process. And that it is in the best interests of the company’s stakeholders that the company be placed into an insolvent liquidation (subject to court approval) at the earliest opportunity.”
As of now, four separate business units under the Arabtec umbrella will go through the insolvency process, including its readymix concrete and precast entities. But Arabtec has not given any indication on what it intends to do with the other subsidiaries. The hope is that some of these businesses could operate on their own.
Arabtec’s statement says as much: “Until such time when an insolvency trustee is appointed, the company intends to continue engaging with key stakeholders to explore options to preserve value and where possible to avoid such subsidiaries needing to be placed into a formal insolvency process.”
Boxed into a corner
Subcontractors will have little to cheer from any of this. While they hope for some eventual recovery of their funds from the winding down, their short-term prospects could be dire. More so, when it comes to their own exposures with banks.
“One of the main issues is the exposure UAE banks will have with subcontractors that took out credit lines on the basis of contracts Arabtec had been awarded and for which they had been signed,” said one industry source. “As these shock waves reverberate through the financial system, the impact on banks will be significant.
“More so, in the absence of any bailout and/or a takeover/restructuring of these obligations by another party.”
Now, if subcontractors are in no position to pay banks on credit extended for Arabtec contracts, they are unlikely to get further help from banks on their other projects. (The first quarter 2021 banking sector results will provide some indication on the provisions being made against any Arabtec related exposures.)
Some heavy numbers
Arabtec’s net current liabilities are about Dh1.7 billion after it reported losses of Dh794 million in the first-half of 2020. “The group's losses have exceeded 50 per cent of issued capital, which raises serious concerns about its future as a going concern,” said Vijay Valecha, Chief Investment Officer at Century Financial. “Unencumbered cash available with the group is only Dh370 million, which is grossly inadequate given the cash outflows.
“Another concern is regarding trade, contract and other receivables, contract retentions and amounts due from clients on construction contracts amounting to Dh5.60 billion and with an expected credit loss allowance of only Dh486 million.”
These are the discrepancies that have crept into Arabtec’s books and left it with no option other than take the liquidation path. The builder of the Burj Khalifa and Louvre Abu Dhabi had run out of time despite some shareholders making a last ditch attempt to come up with an alternate plan to ensure “business continuity”.
Explaining the move to seek liquidation in the courts, Arabtec said the “conclusion was reached following a two-month period of discussions with key stakeholders”.
And now will begin the scramble among subcontractors to get whatever they can from the outcome.