Reuters: Bankruptcy News: DEALTALK-Polish builders face costly Euro 2012 penalties

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DEALTALK-Polish builders face costly Euro 2012 penalties Jul 9th 2012, 11:05 Mon Jul 9, 2012 7:05am EDT (For more Reuters Dealtalks, please double click on ) * PBG, Polimex run into trouble after Euro 2012 building spree * Both mull filing for state aid * They might eventually merge to avoid bankruptcy * Debt load is starting to weigh on Polish banks too By Agnieszka Barteczko and Adrian Krajewski WARSAW, July 9 (Reuters) - When football legend Michel Platini announced Poland and Ukraine as co-hosts of the Euro 2012 soccer championships in 2007, Polish building stocks soared to record highs on the Warsaw bourse. Five years, 94 billion zlotys ($27.3 billion) worth of infrastructure investments and a bidding war later, the two most active firms in the Euro 2012 building frenzy, PBG and Polimex, are saddled with debt and face a state bailout or mergers to keep them afloat. The soccer championship should have been a bonanza for the companies. It went wrong because they took on deals with razor-thin margins, then watched the price of materials soar, creditors grow wary and capital thin out. Nonetheless, with portfolios totalling 21 billion zlotys which include deals for major infrastructure projects, the two may prove too big to fail. Poland's construction sector employs close to 800,000 people and is responsible for around 6 percent of the country's gross domestic product (GDP). More than 100 smaller construction companies have gone bust this year and the government is keen to limit the damage. Economy minister Waldemar Pawlak has signalled a possible nationalisation of PBG and Polimex via state-owned restructuring agency ARP, which could buy into the companies or become their guarantor. He drew a parallel with U.S. carmaker General Motors, which declared bankruptcy in 2009 and received a $50 billion bailout from taxpayers. "Whether bread is baked in a private or state-owned bakery, at the end you get the same bread," Pawlak told daily Gazeta Wyborcza recently. "What's needed is cooperation of the current shareholders, banks and the government." "We talked to the Association of Polish Banks (ZBP) and it seems that lenders want an organised solution rather than a spontaneous bankruptcy," he added. Pawlak's comments cheered investors and the share prices of both groups, on a downward trajectory for weeks, flattened out. ARP told Reuters the companies needed to ask for state aid and that no such motion had been filed yet. But PBG and Polimex said they were considering doing so. "We will probably file such a motion and will aim to do so as soon as possible - particularly since we are working on such key contracts," PBG spokeswoman Kinga Banaszak-Filipiak said. However any request for aid would be just the first step in a long and arduous journey. The European Union is often reluctant to approve such assistance on the basis that it can amount to anti-competitive practice. "This would mark a precedent in Poland. It would have to be a political decision," said a fund manager at a Polish pension fund who declined to be named. With PBG struggling to reach its net-debt-to-EBITDA ratio target of below 3 - it was 3.7 at the end of 2011 - and Polimex's loan payments at 300 million zlotys this month alone, the two need a solution fast. MINUS AND MINUS EQUALS PLUS? Many observers believe a merger is the right solution. The idea of the two companies combining has been raised several times over the past few years as they run similar businesses and could grow scale very quickly, but reluctance on the part of Polimex as well as its fragmented shareholder structure - formed via a series of mergers the group has no controlling stakeholder - has so far been a block. "The conditions are now totally different and if it happened now, it could aim at forging a national construction champion," said a Warsaw-based construction sector analyst who did not want to be named because of the political sensitivities involved. "It (a merger) would be beneficial in the short term, as it would resolve solvency issues and the companies would survive, but in the long run it would mean watering down their shareholder structures." A tie-up would create a player with joint 2011 sales of 8.6 billion zlotys and a net profit margin of 3.6 percent - still a percentage point below their top rival, Budimex, a unit of Spain's Ferrovial which also took a beating in the June stock market sector sell-off. "One way or the other the end-game for the two should be a tie-up," a Warsaw-based private-equity fund manager said. "Their portfolios are comparable. They fit." But both companies reject a merger. PBG which once favoured a deal would now struggle to finance it, while Polimex management has always said no on the grounds that its numerous shareholders would see their stakes diluted by a merger. "Polimex...is able to deal with temporary financial stress alone," its chief executive Konrad Jaskola told Reuters. Banaszak-Filipiak, the PBG spokeswoman, said that company was focusing on internal consolidation, and bringing several small firms that it owns under the same management. But it may no longer be an issue for just these companies or the construction sector. The plight of PBG and Polimex is now starting to affect Poland's banks, which are growing increasingly cautious about rolling over debt after a series of bankruptcy motions elsewhere in the construction sector. PBG alone owes some 1 billion zlotys to several banks including Bank Zachodni WBK, ING Bank Slaski , Nordea, Pekao, BGZ, Banco Espirito Santo, HSBC, and Bank Millennium , raising fears that a wave of bad debt provisions could be about to hit the sector. Polish financial watchdog KNF reported that banks made provisions of 820 million zloty in May - a third more than their monthly average, pushing the sector's combined net profit for the month below 1 billion for the first time this year. "There might be a second wave in the second half of the year if one of the groups falters. There's no tragedy for now, but it doesn't look good either. Construction companies make up just a few percent of the banks' credit portfolios, but still the light is on the banks too in this case," said a banking analyst who declined to be named. ($1 = 3.4468 Polish zlotys) (Writing by Adrian Krajewski; Additional reporting by Pawel Bernat; Editing by Sophie Walker) Link this Share this Digg this Email Reprints

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