Contractors and housebuilders are not banks' favourite customers right now…
Contractors generally work with low or negative working capital and often have cash on the balance sheet. In good times this becomes long-term cash. However, this reverses as turnover declines – which is expected across much of the sector, especially among contractors focused on the private market.
Most banks view contracting – and particularly housebuilding – as almost toxic sectors, and finding new money is difficult. At the very least it will be much more expensive. Government drives to increase lending to SMEs do not yet seem to be having any effect here or elsewhere. Treatment of companies in these tough times will no doubt be remembered when things improve and it becomes a buyer's market for debt. Difficult times can either strengthen or damage firms' relationships with their banks.
Developers, subcontractors and building materials businesses will typically be hit first. Banks generally see less value in contracting businesses in a distress scenario, given their lower asset backing. Credit insurers pulling out of the sector is also putting a squeeze on working capital. Suppliers may no longer be able to insure their debtors and may need to change their trading terms.
The key will be to focus on cash and covenants, contingency planning and maintaining good relationships with stakeholders, and to bear in mind that many relationship managers at banks will have their hands tied or be unclear on what they can – or, more often, cannot – do.
Jan Crosby is head of construction at KPMG corporate finance