Be smart know who you are dealing with and be liquid.
That was the bottom-line advice to help contractors ride out this period of financial insecurity given by David Hombach Vice President of Construction Services for Travelers at a recent AGC Seattle District meeting.
Hombach offered these recommendations to the audience:
- Understand that future deals will have more equity in them; contractors may be asked to participate.
- Underwrite your owners and the funding source thoroughly. Where is the funding for a private project coming from e.g. local bank or overseas? Where does funding for a public project come from and will it be available?
- Use escrow to demonstrate availability of funds.
- Build high quality liquidity through retention of earnings collection of receivables sale of excess equipment pay off high coupon debt prudent and conservative investments; know what you are investing in.
- Communicate with your banker surety and accountants; ask for advice and use them to help vet your owners subs and suppliers and their financing.
Hombach made the suggestions after providing the grim statistics that describe the current financial conditions: The Dow dropped more than 40 percent in the last few weeks; the LIBOR rate (the rate banks charge each other) shot up 200 percent in a month with a slight decrease since the passage by Congress of the financial rescue plan; the TED spread (a measure of perceived risk of lending) went up more than 200 percent recently; the number of commercial mortgages plummeted this year.
When he asked the audience if anyone knew of projects that had been on the books but are now mothballed several hands went up. A few hands went up even when Hombach asked if anyone knew of projects that were put on hold after construction had started. Lender failure owner inability to come up with additional equity and financing shortfalls due to cost escalations were cited by Hombach as some of the leading challenges facing the industry.
In related news see the Oct. 21 Seattle P-I article The Credit Crunch Takes its Toll on Construction. The article contains this salient quote by Scott Wyatt of NBBJ: There are no signs yet of a disastrous slowdown. Were still seeing demand right now today — were seeing requests for new projects. Real estate is long term and people will make long-term decisions. But we are seeing that the lack of capital will likely have a slowing effect.
Also see this article from the same issue of the P-I Port to Dip into Sea-Tac Reserves to Ensure Garage Funding. Summary: Citing petrified bond markets the Port of Seattle Commission voted 4-1 Tuesday to use up to $20 million from Sea-Tac Airports cash reserves to ensure that construction of a $382 million rental car facility continues despite the lack of acceptable customers for the bonds needed to pay for it.