Rebuilding a troubled sector from ground up

State projects and the examinership system will help some building firms survive 2009, writes Barry O'Halloran

THE GOVERNMENT'S patchy economic plan held a glimmer of hope for builders when it was published seven days before Christmas - at the end of a year during which even Minister for Finance Brian Lenihan was forced to acknowledge that the industry had ground to a "shuddering halt".

Building a "smart" economy will also involve building infrastructure. It restates the Government's commitment to spending €8 billion on public projects in 2009, with a focus on those that are likely to employ a lot of people.

From the construction industry's point of view, this is likely to offer the only relief from recession over the next year.

An estimated 40 per cent-plus plunge in the rate of new house building, aggravated by the financial system's meltdown, wiped about €8 billion off the industry in 2008, leaving its contribution to the economy at €30.5 billion, a fall of more than 20 per cent on the €38.5 billion recorded in 2007, when the industry peaked.

It hit that peak around the turn of 2006 and 2007.

That indicates that the construction sector has been slowing for the best part of two years. Initially, the process was a natural result of it completing a record 88,000 new homes two years ago, a number the economy could not sustain.

But the need for credit to fund both property development and purchases meant that the sector was one of the more exposed when lenders' liquidity dried up as the credit crunch and financial crisis hit home this year.

According Annette Hughes of DKM Economic Consultants, who provide the Government with regular snapshots of the building industry, the 20 per cent plunge in the sector's value made it Europe's joint worst performer with Spain in 2008.

She predicted that both countries' building industries are set to share that dubious honour again in 2009, while in Europe itself there is no likelihood of a recovery before 2011. "Overall output in the Irish construction sector is projected to decline by almost 13 per cent over the period 2008-11 or by 4.3 per cent per annum on average," she and her colleague, John Lawlor, recently warned.

Ms Hughes also argued that the Government's infrastructure spending plans are likely to be the only show in town next year, as housebuilding and commercial construction are unlikely to pick up.

Throughout 2008, what had been the Republic's biggest industry, and one which once contributed 25 per cent to the economy, gave off a series of distress signals. Building and building-related companies regularly topped the league of corporate failures, and the Central Statistics Office (CSO) construction employment index stayed in negative territory throughout the year.

The sharp fall in the sector was one of the factors that drove the Republic's economy into recession in the second half of the year.

Many of the insolvencies were small players, the sort of operations that were seen as the most vulnerable when economists began to predict a slowdown in 2006. Further up the scale, Cork firm John F Supple went into, and emerged from, examinership, which means that it is back in business.

The most dramatic casualty was Taggart Holdings, an all-Ireland operation headquartered in Belfast, which went under in October owing Bank of Ireland and Ulster Bank a reported €150 million. It was placed in administration in Northern Ireland, a corporate rescue mechanism available under the law there, and into receivership in the Republic.

Owned by brothers John and Michael Taggart, the business was a combination of property development and construction. The assets that are now under the control of administrator, PricewaterhouseCoopers partner, Garth Andrew Callow in Northern Ireland and his colleague, Billy O'Riordain, who is receiver to four properties in the Republic, are mainly sites geared for residential building and bought with bank borrowings.

Taggart's woes dragged in Dublin stockbroking firm Goodbody, some of whose private clients had entered a €300 million property development joint venture with the company.

The Belfast sites acquired through the vehicle, Taggart Estates, are among the best assets in the group's portfolio, and are ultimately expected to sell.

But to whom? And for how much? Stuart Pearson of Pearson Holdings is the only individual on the record as being interested in buying Taggart's assets, including those in which Goodbody's private clients have a 50 per cent interest.

Who eventually buys them is probably not hugely significant. The price is the real issue. This will give an idea of how much the value of development property has fallen, with ramifications for both the banks and the builders. Lenders have secured the debts owing to them over the properties that the cash was used to buy in the first place.

Banks have only very reluctantly increased their estimates of the money they will not recover from these loans, and they only did so as things deteriorated rapidly in the second half of the year.

Investors still believe they are not being realistic.

For builders the issue is different.

They have to maintain payments on loans against properties that are unlikely to be delivering the returns for which they hoped, if they are delivering anything at all. This isn't just something that affects those at the top of the tree, it runs through the industry and applies to any operation that borrowed to buy property with the intention of developing or redeveloping it, and was then caught by the speed with which the economy turned.

Banks are dealing with a lot of these situations by allowing borrowers interest roll-ups and other concessions to allow them to ride out the storm, which many of them will do.

But as the situation persists, the more vulnerable will come under pressure, so it is likely that we will see more insolvency proceedings of one kind or another in 2009.

This could pave the way out of trouble for some. The examinership system, which gives companies High Court protection from creditors and is uncommon outside of Irish company law, holds out hope for anyone who is legally insolvent, but whose business has a reasonable chance of survival.

In the case of loans secured against property or other assets, the legislation governing examinership allows the liability to be reduced to the security's market value, rather than the sum owed, with the balance treated as an unsecured debt. This was already tested in a case involving ACCBank and the owner of Dublin's Ocean Bar, where the liability was reduced to €950,000 from €1.37 million.

There are likely to be other cases. Arguably that could be bad news for banks with a lot of secured loans, but solicitors with law firm Kenny Lyons, which advised the Ocean Bar, take the opposite view. They argue that the system provides the basis of a workable compromise that gives troubled companies a chance to move on and benefit from the upswing when it arrives, while ensuring that there is a limit on the losses against secured loans that banks will have to suffer.

The other options could simply result in people going out of business, with no real guarantee that the banks would be better off, they say.

Time will tell if they are right. In the meantime, it's likely that players in lots of businesses, including the construction sector, will watch developments in this area very closely.