The collapse of “Arabtec” shakes the foundations of the construction sector...

The collapse of “Arabtec” shakes the foundations of the construction sector...
The collapse of “Arabtec” shakes the foundations of the construction sector...

A little over six years ago, -listed Arabtec Holding had investors making profits out of it. At a lavish shareholder meeting at the St. Regis Abu Dhabi, the contractor that helped build the Burj Khalifa in Dubai, the tallest skyscraper in the world, announced plans to list in London, Hong Kong and New York.
But these plans were never implemented. After an injection of liquidity between 2013 and 2017, changes in management, layoffs, and several rounds of restructuring, Arabtec’s shareholders, including the Abu Dhabi government’s Mubadala Fund, decided last week that the largest listed contracting company in the Gulf must submit a request for liquidation.
According to Reuters, at the end of June, Arabtec’s total financial liabilities were about $ 2.75 billion, of which $ 500 million was borrowed from banks.
The liquidation, which is likely to lead to further layoffs at a company that had a sizeable 40,000-strong workforce as of the end of last year, will spell the end of a phase of boom in construction activity for local contracting firms.
“A great 45-year-old company has vanished from the face of the earth. It is very sad that an iconic company like that has disappeared,” Ziad Makhzoumi, who worked as the financial director of Arabtec from September 2008 to March 2013, told Reuters.
Economies in the Gulf region have been hit this year by the Corona virus and lower oil prices with cuts in its production, but the collapse of construction giants like Arabtec and Drake and Scull International engineering group in the UAE has deeper roots.
Industry sources, analysts and bankers have indicated that some construction companies in the region are using an unsustainable business model.
They lower prices and sometimes project costs than competitors to win a bid in the hope of making a profit by additional work when it starts up.
This model operates on the assumption that the supply from mostly state-supported clients will continue indefinitely, but it quickly collapses when the flow of money stops.
A source in the sector, who wished not to be named, said, “You have a client who can immerse you in work and make you become full of hearing and vision, then in one minute if the state decides for technical or even political reasons or is forced for economic reasons to suspend or postpone projects, then there will be no support after that.” Without foundations the whole house collapses. “
Arabtec did not respond to a request for comment, while Drake and Scull International declined to comment.
And when the business model falters, the ramifications are far-reaching. Although banks have taken a more conservative approach in lending to construction companies recently, analysts say their exposure to the sector remains a crisis.
“Contracting companies and companies in their supply chains are among the main contributors to the formation of bad loans – since the oil price crash in 2015 until now – and we expect this trend to continue,” said Muhammad Damak, a senior manager at Standard & Poor’s credit rating agency and global head of global Islamic finance. .
Makhzoumi said, “Contracting is not a difficult business … if you design, implement and manage in a timely manner, you will be in good shape … if the client does not pay in time … you will be in trouble.”
Arbatec’s decision to liquidate came after losses in the first half of the year amounting to 216.18 million dollars and accumulated losses amounting to about 400 million dollars. The company said that the pandemic had damaged its projects and incurred additional costs.
“Despite efforts to seek legal and commercial benefits and restructure the company’s finances and operations, the situation in which Arabtec has found itself today is unbearable,” said Walid Al-Muqarrab Al Muhairi, Chairman of Arabtec who is also the Group’s Executive Vice President at Mubadala.
Frequent delinquencies of clients in the region have often put pressure on construction companies already affected by the collapse of the Dubai real estate market in 2008 and 2009.
But cash flow problems were usually overcome by running several projects simultaneously and assuming that the supply would continue indefinitely.
For Sachin Keror, associate director of the Middle East office at law firm Red Smith, part of the problem is the contract award method.
“The important thing is to provide a profitable and convenient business field for contractors. Developers and buyers should learn to avoid projects that are awarded contracts because they simply provide the lowest price model. They should understand life cycle costs and award project contracts to contracting companies according to this basis,” he said.
Margins
The collapse of Arabtec, which has been tasked with building the Dubai Expo 2020 site, could pose further pressure on the real estate sector and local banks.
Even before the company’s collapse, Standard & Poor’s Global Ratings had already downgraded the two largest real estate companies in the UAE to “high risk” in light of expectations that measures to contain the Corona pandemic would shrink Dubai’s economy 11 percent this year.
Banks are reluctant this year to give construction companies new credit in light of the slowdown, but a Dubai banker said the liquidation of Arabtec could mean more expected losses.
Arqaam Capital said Dubai’s Mashreq Bank was among the most exposed banks with a loan of 353 million dirhams ($ 96.11 million), and according to its estimates, the rest of the banks could recover only 37 percent of their loan books. Mashreq Bank declined to comment.
Arqaam Capital said in a research note that large developers in the UAE would also suffer.
“The developer margins will likely shrink in new projects, as we expect to re-price construction contracts in favor of contractors after it became clear that the existing business model of local contracting companies … is not sustainable / bankrupt,” she added.

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