Working Capital in the Construction Sector
Following the global recession of 2008, the lengthy period of quantitative easing and low interest rates has provided both opportunities and challenges for UK businesses, including the construction sector. The Bank of England responded to the financial crisis of 08 with the lowering of the bank rate from 5% to 0.5% to help with the economic recovery of the UK. Since 2008, UK businesses have enjoyed the benefits of cheaper working capital to support growth and liquidity through long term debt (Bank of England, 2018). Many lenders have seized the opportunity to issue new debt at or close to historically low interest rates. Not only have the terms improved considerably for companies looking to borrow money from third parties, the amount available has also increased over the last decade with lenders looking for better returns. In 2015, total disclosed facilities reached 10.5 times the level of combined Earnings before interest, tax, depreciation and amortisation (EBITDA) for the top 10 contractors, up from 6.9 times in 2009 (Ernst & Young, 2016).
Access to available working capital has seemingly come under pressure as of late, from March to August 2018 total lending to construction companies fell from £34.5bn to £32.6bn (Construction Enquirer, 16th October, 2018). Not only are small and medium sized contractors feeling the pinch, it is also being felt by some of the UK’s largest contractors. Some two months ago the Construction Enquirer wrote that UK ‘Construction is careering towards another painful credit crunch’ (‘We can’t build anything without finance’, 30th October 2018) with the longest period of lending decline since 2011. It is an increasingly common occurrence for news headlines to publicise some of the largest contractors’ woes, the notorious demise of Carillion at the beginning of 2018 followed by the struggles of Interserve. As of yesterday (8th January 2019), Laing O’Rourke, after two year of consecutive losses between 2015 and 2017, has just completed a refinancing deal following difficult negotiations. It begs the question, with banks cutting lending to the construction industry throughout 2018, what impact will this have on the whole sector which has become increasingly dependent on cheap borrowing to fund growth?
One can speculate that the compounding effects of:
- Brexit uncertainty for the UK economy,
- Losses as a result of Carillion and the knock on effect to it’s supply chain,
- The level of return not justifying lending in what is now a particularly risky industry, have all exacerbated lender sentiment and the change in attitude towards the industry as a whole.
With the recent pressures on working capital in the construction sector, it is increasingly more important to explore alternative avenues of financing to free up banking lines. The UK surety market offers an attractive solution to all business bonding requirements. By issuing bonds through the insurance market, we can free up badly-needed working capital otherwise deducted from a businesses line of credit with banks, which is essential to help fund growth and cash flow. Furthermore, the insurance market prefers to provide bonds of a conditional nature rather than on demand nature, which is a typical feature of a bank facility, thereby reducing the risk of an unfair call on the bond to a contractor. Furthermore, with the UK surety market’s growth, we are seeing rates becoming increasingly more competitive over banks but also more flexible around risk appetite. As specialist surety brokers, we would recommend that those businesses with bonding requirements who currently use their bank to get in touch with a specialist broker to discuss available options.
The Henderson Surety team specialise in all types of bonds and guarantees on behalf of our clients. We have many years of experience with bond wordings and related issues and will be able to negotiate favourable terms for the provision of bonds. All types of bonds are available including the most commonly utilised performance, retention and advance payment bonds.
We make no charge for an initial review and would welcome the opportunity to meet with you in order to discuss and explore how we would negotiate a suitable surety facility for your company.
For your bond requirements or queries please feel free to contact the specialist team at Henderson Surety Services:
London Office: 0207 280 0913
Manchester Office: 0161 687 2317