黑洞社区

For some, the first time they might have realised civils and building contractor NMCN was a listed business was probably reading about them in the press because of the slew of recent stock exchange announcements it has been forced to pump out, grimly detailing its escalating woes 鈥� principally the amount of money it expects to lose when it eventually publishes its 2020 accounts. Each one has seemed to be worse than the last.

Not many realise that it can trace its origins back to 1946 while for others it is better known as North Midland Construction.

But what is happening to the Nottinghamshire-based contractor, which listed as a public company in 1982, is arguably construction鈥檚 biggest corporate crisis, certainly among listed firms, since Carillion.

A would-be white knight called Svella waits to rescue the company in return for a majority stake in the business. But a deal still has not been signed off yet.

How NMCM got here

It might not be as strategically important as Carillion, Kier or Interserve 鈥� two other firms that have had to endure very public financial battles 鈥� but any collapse would be catastrophic. According to its last annual report, NMCN employed 1,700 people and given its last recorded annual turnover was 拢405m in 2019, the effects on the supply chain, already battling rising costs from labour and materials shortages, would be enormous.

Ever since Carillion went bust more than three years ago now, the temptation to use what happened there as a benchmark 鈥� a warning of just how bad things can become 鈥� for similarly stricken firms is overwhelming.

Carillion shocked the market four years ago this month when it put out a trading update that said it was having to make a provision of 拢845m, adding that chief executive Richard Howson was stepping down. But it did not end there. That November, it said things had got worse.

So far, NMCN has followed the same pattern. In September, it caught the market off guard when it said its chief executive, John Homer, was standing down with immediate effect but gave no explanation as to why 鈥� always a worrying sign 鈥� although it hinted at the troubles ahead, adding it 鈥渕ight鈥� incur losses for 2020.

The following month, things became a little clearer when it told the market that, following a review, it now expected to make a 拢15m loss in 2020. It has made four revisions to that figure since 鈥� all upwards 鈥� with the latest bombshell last Tuesday when it said losses for last year would be 鈥渟ignificantly鈥� more than the 拢24m it said it would be shipping at the end of May.

According to one rival chief executive, use of the word 鈥渟ignificant鈥� will have added millions to the final bill. 鈥淚n stock exchange speak, 鈥榮ignificantly鈥� usually means 10% or more on what鈥檚 already been announced,鈥� he says. 鈥淚 would think this means another 拢3m at least.鈥�

Asked why the firm has repeatedly upped the amount of money it expects to lose in 2020, he adds: 鈥淲hat happens is that WIP [work in progress] can be overvalued and you often look at the outcome through rose-tinted spectacles.

鈥淭he other thing is that if you take too big a loss initially, you could be in breach of banking covenants. It鈥檚 a horrible conversation to have but perhaps better to lay the cards on the table.鈥�

NMCN鈥檚 shares remain suspended because it has not filed its 2020 accounts yet, something it is now promising to do next month 鈥� when its listed peers will be filing their interim results for 2021. In fact, one firm, M&E firm T Clarke, already has.

NMCN鈥檚 last two sets of half-year results have both appeared around the first week of August so, depending on when the 2020 accounts get filed, investors, in theory, might be poring over 18 months鈥� worth of results within a couple of days.

The Svella deal

In a recent interview with 黑洞社区, Kier chief executive Andrew Davies revealed one of his first to-do jobs when he arrived at the firm, a key government supplier, was to get a plan in place and calm government nerves.

The most important thing for NMCN鈥檚 new chief executive Lee Marks is to get a plan in place and get the deal with Svella sorted. To calm nerves, then.

In Tuesday鈥檚 update, he seemed optimistic. 鈥淪vella has worked very well alongside the company to progress the transaction and remain committed to ensuring that the recapitalisation is completed at the earliest opportunity,鈥� he said.

Marks arrived at the firm, which rebranded into its current iteration three years ago, in May, eight months after Homer left. Homer arrived in the summer of 2016 after 12 years at Morgan Sindall where he was in charge of that firm鈥檚 construction business for the south.

On the face of it, Homer, who is now a self-employed construction consultant, appeared to have done a good job.

Pre-tax profit in 2017, his first full year of stewardship, was just over 拢1m. By 2019, his last full year in charge of the business, the number had gone up to nearly 拢7.5m.

But announcing the 拢24m loss in May, NMCN said a quarter of this figure was down to its 2019 performance. Last week鈥檚 announcement underlined that, with the firm also blaming 鈥減erformance issues鈥� at its building arm. It has previously said two problem water contracts and its building arm were at fault for its deteriorating financial situation but last week was different: the building arm was being put at the centre of the latest revision.

Impact of covid

The company has not said which contracts have hobbled it but, turning to the losses it expected to make when announcing the Svella deal last month, it admitted: 鈥淎 significant proportion of these losses were attributable to covid-19 and programme delivery delays, as well as costs associated with process commissioning and handover.鈥�

In a statement to 黑洞社区, Marks said its 2020 accounts will include 鈥渓egacy loss-making contracts鈥� from both 2019 and 2020, adding: 鈥淲e are working to close out these historic matters as a priority. We had already reflected the majority of the increased 2020 Results loss within our existing internal working capital projections and these have been considered as part of the recapitalisation.鈥�

Much now depends on the firm signing off its deal with Svella which is expected to take place next month or by early September.

According to its website, Svella, set up by two former executives of transport and logistics firm Stobart Group, including ex-chief executive Andrew Tinkler, is 鈥渁n investment and acquisition vehicle set up to raise funds and acquire controlling interests in underperforming businesses and assets鈥�.

It adds: 鈥淚nvestee companies will be businesses which were once strong but have suffered recently, predominantly due to the covid-19 pandemic.

鈥淲e will then improve performance, through a combination of management focused strategic improvements, delivering shareholder returns within three years.鈥�

Svella鈥檚 deal with NMCN comprises 拢10m already pumped into the business via a bridging loan and an additional equity fundraising of 拢19m, which includes raising 拢14m from new investors, and a further 拢5m from existing shareholders.

The bridging loan includes a 10% arrangement fee and a 10% exit fee 鈥� meaning it will pick up fees of 拢2m 鈥� as well as a 25% annual interest fee.

Marks adds: 鈥淪vella continues to work with us to progress this recapitalisation which will provide the required capital to allow us to achieve our growth potential. Svella remain committed to ensuring that the recapitalisation is completed at the earliest opportunity.鈥�

He says Svella is working on the prospectus and circular required to complete the refinancing, with the deal having been backed by NMCN shareholders at its general meeting last week.

Svella says it will sink up to 拢7.4m into the business as part of the equity raise but that still leaves a significant sum to find. 鈥淚t鈥檚 not as if it鈥檚 a business that鈥檚 doing something that others can鈥檛 do,鈥� the rival chief executive 黑洞社区 spoke to adds. 鈥淚t鈥檚 looking for new investors but I wouldn鈥檛 be one of them,鈥�.

As part of the recapitalisation, NMCN鈥檚 existing lender, Lloyds, has agreed to extend the firm鈥檚 拢12.2m overdraft until the end of September. But when announcing details of the Svella proposals, NMCN admitted that its existing debt facilities 鈥渨ere not sustainable鈥� 鈥� hence the need for additional investment 鈥� adding that 鈥淟loyds had indicated their desire to reduce their exposure鈥�.

The 拢12.2m overdraft will be replaced with a revolving credit facility of up to 拢8.5m once the deal with Svella is completed.

But the bank will be looking hard at its choices, the chief executive says. 鈥淓ither they鈥檒l put it in administration, or they鈥檒l back the management to trade their way out of it.鈥�

A lot, then, hinges on tying up the Svella deal 鈥� or as NMCN put it last month: 鈥淥n completion of the Transaction , the Company will have sufficient cash and debt facilities available to it to generate a positive cash headroom position.鈥�

Asked about its chances of survival, the chief executive says: 鈥淚 reckon it鈥檚 50:50.鈥� Cenkos analyst Kevin Cammack adds: 鈥淪vella鈥檚 continued support increasingly seems vital to the group鈥檚 very survival.鈥� Another is blunter: 鈥淸NMCN] is dead if that investment doesn鈥檛 come in.鈥�