Geopolitical risks, opaque accounting, unpredictable margins – you name it. The construction sector has been hit by the perfect storm in recent years, squeezed between macro headwinds and sector-specific wounds. In Italy, the industry is still very much in trouble with some of the domestic champions undergoing or facing potential lengthy restructurings, speakers and attendees at the Debtwire Italian Forum in May concurred.

Panelists included Pietro Braicovich, Managing Director at Leonardo & Co in association with Houlihan Lokey, Stefano Cassina, Senior Partner at Quattro R, Carlo de Vito Piscicelli, Partner at Cleary Gottlieb Steen & Hamilton, Salvatore Lombardo, Partner at PwC, and Stefano Visalli, Managing Partner at Oxy Capital.

“This is a sector where it is very hard to figure out a company's real margins,” Braicovich pointed out. “You should go through every single order, with a bottom up logic instead of top down. In addition, as recent cases have shown, accounting is often opaque, making it even more difficult to know what the real drivers of the business are.”

Companies often participate in tenders and bid on the cheap in order to win, hoping to make up for the lost margins while the project is underway.

“But what if in your final margins that extra you were counting on does not materialise?” Lombardo said. “You should rather find the right order to bid for, bid appropriately, and even be prepared to change things while in progress if need be.”

On top of that, construction companies face external headwinds that are difficult to control. “Take Venezuela or Bolivia for instance: they offer interesting opportunities for construction groups but equally, they carry high political risks,” Lombardo continued.

Recent restructurings have also highlighted the need for management able to keep up with the various challenges. “There is a theme of professionalisation, which doesn't concern only the top management. At each level, you need to have people on top of the various potential issues, especially for risk management,” Cassina said.

A further issue relates to money blocked on receivables due to disputes arising with clients, which impacts the sector's profitability and makes a hard sell to prospective financiers.

“Obviously you cannot finance only with cash, but what is the best way to finance? The era of extend and pretend is over, it no longer works. You need a full financial and operational restructuring if you really want to turn things around. Even family owners now seem to have got it, and are more prepared for the next cycle, with new shareholding structures and fewer players on the market,” Lombardo commented.

When it comes to choosing a restructuring tool, a company should bear in mind four main goals, de Vito Piscicelli highlighted. “First, you have to try and retain value, which means avoid the counterparties terminating existing contracts, which could lead to huge write-offs of accrued receivables and generate additional liabilities. Second, you will want the ability to terminate unprofitable contracts. Third, the company must continue to be able to participate in new tenders. And finally, it must be able to keep financing itself, including obtaining performance bonds.”

To do so, the questions you need to answer first include figuring out where the debt sits, where the counterparts to the contracts are located and under which laws the contracts are governed. Once you have those squared, you can determine which tool in the restructuring book – an out of court restructuring agreement, a concordato preventivo proceeding, etc., is best suited to achieve these goals in the circumstances, he argued.

“You often end up dealing with multiple filings, as [Spanish construction group] Abengoa has showed, as these companies are rather international, both in terms of facilities and contracts,” de Vito Piscicelli added.

But despite the challenging backdrop, the sector can still offer some appealing investment opportunities, provided that a number of boxes are ticked.

“To navigate the crisis, first and foremost you must tackle it early. Then finding a new partner is a natural step, as most of these companies often need an industrial investor,” Braicovichcommented.

“Entry time is key: you need to invest in a company at the right moment,” Cassina added. “The positive is that despite being very complex, it is a sector easy to read, with plenty of market metrics to work off. And if you take a liquidation scenario as your floor when investing you can even target market value returns.”

“You can look at companies with a rather speculative view, for instance providing new money in rescue scenarios,” Visalli concluded. “But as the sector needs consolidation, you can also look at single names with a view of aggregating at a later stage. This is where the market is going and what it is asking for.”

Chiara Elisei Deputy Managing Editor Debtwire

Chiara joined Debtwire in February 2008. Since then she has been covering restructurings and distressed, with a focus on retail, construction and food & beverage sectors. In the past few years she has been expanding Debtwire's Southern Europe coverage, unveiling distressed opportunities in Spain and Italy. She is currently an Editor in charge of leading new coverage initiatives.

In Italy she worked as reporter at Corriere della Sera, Il Messaggero, RAI covering current news and international affairs.

Chiara graduated in Classics at Scuola Normale Superiore, Pisa, where she also got a PhD in June 2010.