Fletcher Building indicates that paying down its debt is in order to prevent a fire sale of assets

Embattled construction giant Fletcher Building [FBU] is seeking to raise $700 million to pay down debts and avoid having to conduct, in effect, a fire sale of assets.

The company went into a trading halt on NZX on Monday as it announced the planned capital raise, which is fully underwritten by investment and advisory group Jarden. 

Fletcher, which recently announced a $227 million loss for the financial year to June 30, 2024, said the capital raising is "being undertaken as a prudent measure to strengthen the company’s balance sheet and improve financial stability and resilience in the current challenging environment".

The company said the capital raising would support its commitment to "maintaining an investment grade credit rating and covenant headroom under our debt facilities".

The statement said that while the company expected that market conditions will eventually recover, an improved financial position allowed it to focus on operational performance and "preserves optionality in relation to its portfolio and reduces short term pressure to realise assets at below intrinsic value".

The company's incoming managing director and CEO Andrew Reding said the equity raising "bolsters our financial position, assisting us to better endure near-term market headwinds".

"With a strengthened balance sheet, the company can focus on executing key operational initiatives in preparation for a market recovery. In addition to the equity raising, Fletcher Building remains committed to ongoing cost reduction initiatives to manage profitability in the current operating environment, and we have targeted approximately NZ$180 million of gross overhead cost savings to be delivered in FY25."

Fletcher has already been selling assets and when it announced its full year results it made fleeting reference to potentially selling at least part of its residential business. It said at the time that now was the right time to "explore capital partnership options for residential and development, to invest in and drive the next phase of the business’s success".

"Consequently, we have engaged [investment and advisory group] Jarden to explore partnership options with both local and international investors," the company said then.

The capital raising announcement on Monday doesn't give any updates on this.

FMA investigation

Among a number of risk factors highlighted around the company, however, is the previously undisclosed fact that it is being investigated by markets watchdog the Financial Markets Authority (FMA) in regard to compliance with "continuous disclosure obligations".

It relates to announcements Fletcher made to NZX on February 5 and February 14 this year. The February 5 announcement among other things, disclosed a further $165 million provision in relation to the troubled, fire damaged, New Zealand International Convention Centre project in central Auckland.

The February 14 announcement was to announce a $120 million loss for the first half of the 2024 financial year.

"In June 2024, the FMA issued to Fletcher Building an information-gathering notice under section 25 of the Financial Markets Authority Act 2011 in relation to the Investigation," Fletcher said.

"The Investigation is ongoing, and the outcome is not known at this time. However, Fletcher Building believes that the release of information in the relevant announcements in February 2024 complied with its continuous disclosure obligations. If the FMA was to determine that Fletcher Building did not comply with its continuous disclosure obligations, Fletcher Building may be subject to adverse consequences," the company said.

An FMA spokesperson said the FMA generally does not comment on whether or not it has received a complaint about - or is making inquiries into - a specific entity or person.

"The FMA is aware of the information released to the market this morning, but has no further comment, in order to protect the integrity of its inquiries," the spokesperson said.

Fletcher recently announced it would be making a A$155 million provision for a 'joint industry response' (JIR) relating to leaky pipe issues involving its Iplex subsidiary in Western Australia.

In the capital raising materials released on Monday, Fletcher said parties continued to work to finalise the JIR long form documentation "and were targeting that to occur by the end of September 2024".

"There is a likelihood that time frame will not be met."

Fletcher said there has been no change to the assessment of the expected provision that Fletcher Building expects to make in its FY25 financial statements if the JIR is finalised, "being the pre-tax provision of approximately A$155 million which was announced on 30 August 2024".

"However, that provision does not represent an assessment of the litigation risk or other risks to the group relating to the plumbing failures outside the JIR itself. That provision is the group’s assessment of the cost to it of meeting its commitments under the JIR, if that JIR is agreed.

"However, Iplex® AU’s direct costs under the In Principle Terms are not capped. If the JIR is agreed on the In Principle Terms but Iplex® AU’s direct costs exceed its expected share of those costs, or it incurs significant litigation or other costs outside of the JIR itself in relation to the plumbing failures, then this could have a material adverse effect on the financial position of the Group.

"If entry into the JIR is delayed beyond September 2024, Iplex® AU will need to consider its position in relation to continuing to fund participating builders on the terms of its existing Investigation Fund."