Lockton lifts lid on the Probuild collapse

Lockton lifts lid on the Probuild collapse | Insurance Business Australia

Lockton lifts lid on the Probuild collapse

Today, the creditors of collapsed construction company Probuild are expected to meet for the first time. The meeting follows a Federal Court hearing on Wednesday at which Justice Jonathan Beach granted a 21-day extension for the firm’s Deloitte administrators to locate all relevant creditors and property.

“The administrators do not yet know what parts of the Probuild companies’ business will be the subject of a sale and/or recapitalisation transaction,” said Justice Jonathan Beach.

The court heard that Probuild’s annual revenue was in excess of $1.4 billion with 768 employees engaged in 19 major construction and development projects across Australia.

However, according to the Sydney Morning Herald, records show the firm was hit by a significant drop in revenue last year to $1.6 billion, from $2.4 billion a year earlier.

Read more: AIG, Tokio and Swiss Re among insurers exposed to Probuild collapse

Hamish Austin QC, who represented Deloitte at the hearing, said that Probuild owed employees $14 million, and unknown amounts to more than two thousand creditors.

Citing documents sent to creditors, the Australian Financial Review reported that five global insurers are linked to the impacts. American International Group (AIG), Tokio Marine Nichido, Euler Hermes, Liberty Mutual Group and Swiss Re were all mentioned in the AFR report.

“For a construction firm of Probuild’s size it is not unusual to see multiple insurers with some form of exposure,” said Liam Berry (pictured), national manager for trade credit, surety and political risk at Lockton Australia.

Berry said this is possible through surety bonds. He said issuing these bonds is a requirement of large construction companies in the majority of their contracts.

“Surety arrangements are contractual obligations and are an effective balance strengthening tool for contractors,” he said.

Berry said this allows a company to meet the demand for credit capacity across multiple projects that would be larger than any one insurer or bank would be willing to provide.

“Surety arrangements are also unlike a traditional insurance policy where there can otherwise be a limitation or restriction on a single insurer,” he said.

However, Berry added that it is common for surety providers to provide sizable coverage on an individual basis for specific projects.

“For example, Probuild would have had a number of active projects at any one time. In this case, one Probuild project may have been backed by a single insurer, whereas another project might have been backed by another surety,” he said.

“If a claim is made by the beneficiary of a bond then the indemnity signed by the contractor results in a requirement to reimburse the insurer for the amount paid out,” added Berry.

The AFR report also mentioned that a “syndicated facility” exposed Liberty Mutual Group and Swiss Re to Probuild’s financial issues.

“In syndicate arrangements, banks who issue bonds on behalf of multiple parties may transfer a portion of their risk on to various insurers who effectively insure the bank’s exposure, again leading to multiple companies being exposed,” said Berry.

Berry said without seeing the administrator’s report it is too early to say what exactly caused Probuild’s collapse. However, he suggested that fixed price contracts could have been a significant issue.

“If projects had been tendered on a fixed price basis, with limited or no ability to increase prices to cover raw material or supply increases, it will place continued pressure on builder’s cash flows and ability to continue to trade,” he said.

Berry said it is well known that Probuild had a couple of projects that were causing problems in the lead up to their collapse.

“Fixed price contracts are still relatively normal, but they do place pressure on contractors more broadly as they are often exposed to price risk for materials and labour,” he said.

“Given the paper-thin margins of the construction industry, it can only take one or two failed fixed-price projects to significantly impact the continuity of an organisation,” added Berry.

In response to the collapse, Australian Constructors Association CEO Jon Davies said the industry’s focus on selecting contractors based on the lowest price and the greatest transfer of risk is unsustainable.

“The sentiment of this message has been said for years and Lockton agree with Jon Davies,” said Berry.

“If the current operating environment continues, regrettably we anticipate further business failures,” he added.

Read next: Allianz predicts what lies ahead for the construction industry

The Probuild collapse, he said, will also have knock on effects.

“For example, sub-contractors not being paid by Probuild. Unpaid invoices could lead to sub-contractors going into administration themselves,” said Berry.

There are also unpaid suppliers with minimal recoveries expected, he said, likely leading to job losses and further problems for contractors.

However, Berry added that despite these likely developments, sureties will continue to perform as expected.

“They are all highly reputable insurers with extremely strong balance sheets. Surety provides an instant injection of cash-flow in times of need for project owners,” he said.

Berry expects Deloitte’s Creditors Report to reveal more information.

Lockton claims to be the world's largest, independently owned insurance brokerage with more than 160 associates across Australia and two global headquarters, one in the United States in Kansas City, Missouri, the other in London, England.