ANZ to rescue after Forge's power station problems
Under the deal, the bank is to provide an immediate $60 million working capital facility, up from $11 million, while deferring quarterly principal repayments of an existing facility for the next three quarters.
Additionally, ANZ is to receive warrants equal to 13 per cent of Forge's capital.
"Liquidity is stable now ... this is a debt fix," Forge's chief executive, David Simpson, said of the deal.
The collapse in the company's share price on Thursday means Forge is unable to raise funds from equity markets any time soon.
The share price slumped after it disclosed $127 million in losses on two power station contracts, which will result in a gross loss of as much as $90 million this financial year.
Forge shares dived to close at 68.5¢, down 83.6 per cent on the day, though well clear of the low of 28.5¢.
Before the November 4 trading suspension, the shares were worth $4.18, valuing the company at $360 million. This was already well down from its September high of $6 a share.
Forge said its loss before interest, tax, depreciation and amortisation for fiscal 2014 would be $85 million to $90 million. Putting the write-down to one side, the gross profit as measured by EBITDA would be $45 million to $50 million.
Forge has encountered heavy losses on the construction of the Diamantina power station in western Queensland and the West Angelas power station in Western Australia.
In both cases, it made extensive use of subcontractors, which left it exposed to cost blowouts from contract variations, coupled with poor project management.
Typically, Forge does not use subcontractors, which allows clearer cost management of complex projects.
"I'm the CEO. I'm the head of the train," Mr Simpson said. "The board holds me responsible."
The problems with the contracts only emerged in October, which prompted a fuller assessment of the extent of the problems.
The troubled contracts were inherited from the acquisition of CTEC in early 2012, which used subcontractors extensively for the two power stations. Mr Simpson took over as CEO in mid-2012.
Forge traditionally manages the work in-house, giving it direct control over the work under way and any contract variations.
Frequently Asked Questions about this Article…
ANZ has stepped in to support Forge Group by providing a $60 million working capital facility, up from $11 million, and deferring quarterly principal repayments for the next three quarters. This deal aims to stabilize Forge's liquidity after financial troubles due to two bad contracts.
Forge Group's share price plummeted due to the disclosure of $127 million in losses from two power station contracts, leading to a gross loss of up to $90 million for the financial year. This significant financial hit caused investor confidence to drop sharply.
ANZ's involvement has provided Forge Group with much-needed liquidity, allowing the company to continue trading despite its financial difficulties. The bank's support includes a substantial increase in working capital and deferred repayments, which are crucial for Forge's short-term stability.
The main issues with Forge Group's power station contracts were cost blowouts and poor project management, primarily due to extensive use of subcontractors. These problems were inherited from the acquisition of CTEC and were not typical of Forge's usual in-house management approach.
Forge Group traditionally managed its projects in-house, which allowed for clearer cost management and direct control over the work and any contract variations. This approach helped avoid the cost blowouts experienced with the subcontractor-heavy projects.
The acquisition of CTEC in early 2012 brought with it problematic contracts for two power stations, which relied heavily on subcontractors. These contracts led to significant financial losses for Forge Group, highlighting the risks associated with subcontractor use.
David Simpson, the CEO of Forge Group, has taken responsibility for the issues, stating that the board holds him accountable. The problems with the contracts only became apparent in October, prompting a thorough assessment of the situation.
Despite the significant write-downs, Forge Group projects a gross profit, as measured by EBITDA, of $45 million to $50 million for fiscal 2014. This indicates that the company still expects to generate some level of profitability despite the challenges.
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