Fletcher Building in line for downgrade as debt bill nears $2b

Global ratings agency Moody’s has put Fletcher Building on notice for a possible investment rating downgrade as its net debt nears $2 billion to pay for project cost blowouts.

Moody’s had a stable outlook on Fletcher with a medium-grade credit rating of Baa2, but notified the firm it was reviewing that after a $120m sixmonth net loss was revealed last week.

Fletcher Building chief financial officer Bevan McKenzie said in a market announcement yesterday morning the company was committed to keeping its stable rating. “We will work alongside Moody’s during their review period, demonstrating our commitment to the credit metrics which underpin our rating of Baa2.”

Fletcher Building’s existing rating was defined as having moderate credit risk. But any drop would signal more substantial risks. A rating below Baa3 was seen as non-investment grade, according to the ratings scale used by Moody’s.

Fletcher Building’s net loss for the six months to December was caused by a further

$180 million of cost increases, including

$165m for the SkyCity International Convention Centre, which were being funded by debt.

The company was still awaiting an insurance payout of more than $100m to cover some cost increases on the fire-damaged SkyCity project but because the exact payout was not yet certain, it could not be counted under accounting rules.

“We’ve got a push-and-shove process to go through with our insurers,” chief executive Ross Taylor told the Herald’s Markets with Madison following the result last week.

“I think we’ve got very solid grounds [legally], the thing is, we can’t book it.”

Insurers had confirmed a payout would be given but not exactly what damage it would cover, and any payout was not expected to be received until calendar year 2025, Fletcher’s interim financial statements said.

As a result of increased costs, the construction company’s debt-toearnings ratio had risen to 1.8 times, from 1.2 times last year — the top of its range was capped at 2 times. “We intend to stay within that,” Taylor said last week. In dollar terms, debt had increased to $1.9b in December, from $1.4b in June last year.

The company had $2.87b in lending facilities available to it in a mix of bank loans and offshore lending arrangements, but had already drawn down $2.16b, leaving around $700m available. It was paying an average interest rate on its debt of 6 per cent.

The company’s repayment bill was forecast to be around $140m in the 2024 financial year.

It recently increased its bank debt and pushed out the maturity on that loan to 2026.

“We always stress test the balance sheet,” Taylor said last week. He could not be sure that more cost increases would not come before the Convention Centre was finished at the end of 2024 but was confident they would not.

“I think we’re through the remediation now and we’re fully procured, we’re into the fit-out of the Convention Centre, so I think we’re in a much better place.”

The company said in its half-year result presentation it had taken prudent steps to shore up its balance sheet, including cancelling an interim dividend payout to investors and pausing some residential developments.

We will work alongside Moody’s during their review period, demonstrating our commitment to the credit metrics which underpin our rating of Baa2.

Bevan McKenzie, CFO