David Hargreaves says the latest update from embattled construction giant Fletcher Building gives some clarity around where the company is right now - but the immediate future still looks decidedly murky

By David Hargreaves

Humans, being the essential optimists that they are, have a tendency - bless their cotton socks - to come out with an expression when the world around them is turning rapidly to custard.

"Well, things can't get any worse!" This will be the defiant refrain.

If you really think about it though; why shouldn't things get worse? Who decided that the situation you currently face is absolutely, completely a worst case scenario?

The reality is, there's nobody who can draw that definition.

In my experience of covering corporate news, I would have to say the reverse to this popular refrain tends to be true. OF COURSE things can get worse. And they won't get better just by you thinking they ain't going to get worse, that's for sure.

Anybody applying the sunny-side up view of Fletcher Building in the past year (and many share analysts have been conspicuous in this regard - I think simply because of the broad exposure the public has to the stock; people NEED Fletcher to do well) has watched as Fletcher has descended into a deeper and deeper hole. This hole, courtesy of the errant Building and Interiors Division is now stuffed with about a billion dollars' worth of losses in the past two years.

Personally, I always have difficulty relating to losses that are of a greater magnitude than any sum of money I can actually imagine having, let alone losing. And Fletcher are going to be more than $400 million down the pipe on the SkyCity International Convention Centre alone. I struggle to get my head around that.

It takes a certain something to lose that much money. Accountability? Recriminations? Heads being paraded on spits? It's likely none of this will happen. Oh, the shareholders will be grumpy - and remember, thanks to KiwiSaver, that includes a lot of us.

What's done is done

To be honest though, there is really no point at all now coming out with the blame game. What's done is done.

The important bit is how Fletcher gets itself out of this - and there things might be rather less straight forward than people might be inclined to think from the latest update.

By deciding to stop doing the kind of projects that have caused this strife, and effectively putting the B&I division into runoff, Fletcher has at least applied the golden principle of "if you find yourself in a hole, stop digging". 

That's good.

Also good is that the company was able to reaffirm that profitability in other divisions is as expected. 

The financiers hold sway

All of this would be fine if the company's financiers had said they were okay with things and were happy to let the company go on and sort itself out.

But they haven't.

The banks - as I expected they would, have done this. When you look at it, with many of the banks being Australia-New Zealand focused, it would be an act of extreme masochism on their part if they did not give Fletcher more rope. A Fletcher in distress could cause other people to whom the banks have loaned money distress. So, it's very much in the banks interest to get alongside.

However, the problems were always likely to come from the private investors (apparently mostly in the US and Japan) that are collectively owed over $1 billion. Fletcher raised money from these folk a few years back when it was trendy to do so, but might now be regretting it. 

Not agreed

These people have not agreed to a waiver over the series of breaches of lending covenants that Fletcher has incurred. And Fletcher's now trying to get all this sorted by March 31. I don't know how many individual parties are involved here. But it must be a few. And I dare say getting them all to agree one course of action might be a bit like the proverbial herding of cats.

The other thing is, these folk are unlikely to have the depth of understanding and to some extent the sense of wider responsibility that all the banks have. Banks don't want to create earthquakes because they know that other customers of theirs would be affected. Private investors may be less inclined to think so broadly. 

I'm not saying Fletcher is going to get met with a brick wall here, but I am saying that until it's got this sorted, it is not out of the woods - nor are shareholders.

I saw some suggestions and expressions of relief on Wednesday that Fletcher did not announce a capital raising. Well, sorry, it's too early to be relieved on that one. Fletcher doesn't know what capital requirements it might have till it has sorted out these covenant breaches.

Pay them off?

My guess is that Fletcher may well have to end up paying off at least some of these private investors, and possibly quite soon - given that the end of March is the deadline for sorting this out.

Where would the money come from?

It's possible, very possible, I think that the banks may well come to the party and greatly increase their exposure - again because it is in their broader interest to ensure a healthy Fletcher.

But there would be a pound of flesh involved.

Personally, I'm now more certain than ever that Fletcher WILL have to go to shareholders for more capital - and possibly quite a chunky amount.

The other option of course is asset sales. And Fletcher unquestionably has some good ones. 

Distressed seller

The problem is, once anybody see that you are a potentially distressed seller, then the potential price goes down. That's the law of the jungle.

It may well be that Fletcher over time sees it as prudent to downsize, sell off assets, maybe even break itself up.

It would, however, be far better to do such a process without anything hanging over its head.

So, watch this space. 

I, for one, am not prepared to say this couldn't get worse yet.

Here's genuinely hoping those private investors do come to the party. Otherwise, many bets are off.