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M&R dispute with Middle East client turns ugly

Bank account of JV in which M&R has 30% stake debited AED474m (R1.95bn) ‘without formal notice’ and paid to client.
Group says the debit has put the account into overdraft of an equivalent amount. Image: Shutterstock

A dispute between a Murray & Roberts (M&R) joint venture and a Middle East client, which last year issued a notice to the JSE-listed group’s Abu Dhabi-based company to draw down on two guarantees worth 474 million United Arab Emirates Dirham (AED) for a completed project in the region, has turned ugly.

M&R reported on Monday that a Dubai-based bank, which issued a performance security and a loan guarantee to the Abu Dhabi general services company Musanada on behalf of the Habtoor Leighton Group/Murray & Roberts Contractors (HLMR) joint venture in Abu Dhabi, has without formal notice debited the joint venture’s bank account with AED474 million and paid the funds over to the client.

M&R is a 30% partner in the joint venture with HLG Contracting, an Abu Dhabi-based construction company.

It said this debit has placed the joint venture account into overdraft of an equivalent amount, adding that HLMR considers this instruction by the client to have been issued in utmost bad faith.

However, M&R stressed that the bank has no direct access to the funds of Murray & Roberts Limited and will have to pursue a claim under the parent guarantees in the normal course.

“The payout under these bond securities is not expected to have any income statement impact, nor any direct cash flow implications for the group,” it said.

‘Without cause’

“Murray & Roberts Limited has already placed the bank on formal notice that it will resist a call against the parent guarantees, as the bank was fully aware and on notice that the claim by the client against the performance security and loan guarantee was without cause.

”To this end, to protect the parent guarantees it has issued, Murray & Roberts Limited will pursue its defences in both the offshore courts in Dubai, as well as the courts in South Africa. The group will continue to provide further updates to stakeholders as appropriate,” it said.

The notice by Musanada was issued on July 21 2020 after the end of M&R’s financial year to June 2020 for the $1.3 billion Al Mafraq Hospital Project in Abu Dhabi, now renamed the Sheikh Shakhbout Medical City project.

M&R gave notice several years ago about its intention to exit the Middle East.

The AED221 million performance security was issued by the bank in 2011 and the AED253 million loan guarantee in 2016.

M&R said Musanada instructed the bank to pay out these two guarantees despite an amicable negotiations process, the project having been completed and handed over in July 2019 and Musanada owing HLMR the balance of the contract price, which is still under negotiation.

It said the joint venture constructed, fitted out, equipped and handed over the medical facility project to Musanada 18 months ago and the final taking-over certificate was dated July 31, 2019.

M&R said HLMR early in 2020 submitted a claim against Musanada for the balance of the contract amount in the Abu Dhabi court.

“This claim has been stayed on two occasions by mutual agreement while the parties engaged in amicable negotiations to settle the claim.

“These amicable negotiations included having a third-party expert evaluate the amounts in dispute, which expert issued its report today (January 18 2021) and found substantially in favour of HLMR on matters of principle and entitlement,” it said.

M&R added that Musanada has over the past six months continued to demand that a payout be effected but a number of actions and initiatives on the part of both HLMR and the bank resulted in this being averted.

Project completed to specification

It said HLMR has consistently maintained there is no basis for the payout to be made because the project had been completed to specification and the fully functioning hospital has been in use for over a year.

In addition, M&R said HLMR has a reasonable expectation that its claim against Musanada would be resolved through amicable negotiation, assisted substantially by the input of the third-party expert.

Two other JSE-listed groups, Group Five and the Aveng-Stabag Joint Venture (ASJV), have experienced difficulties with performance guarantees in recent times.

For Group Five, which is in business rescue and delisted from the JSE in June 2020, this related to the $410 million Kpone power plant in Ghana while for the ASJV this related to the Mtentu River Bridge project on the Wild Coast for the SA National Roads Agency (Sanral).

M&R CEO Henry Laas said in September 2020 when M&R released its annual financial results that exiting the Middle East is one of the group’s focus areas for the new financial year.

“We have been trying our best for so long to get out of that region. We have now completed all the projects and we do not have any construction ongoing in that market,” he said.

“It’s now about closing out all the financials and that is a major task. In the Middle East you fight tooth and nail for every cent.”

Shares in M&R dropped by 3.8% on Monday to close at R8.85.

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A lot in the middle east turns bad.

Working in the industry has been very challenging for a number of years, most stimulus and infrastructure spending by governments across the world have dried up.

There are 3 types of contractors:
1) Those who bet with debt
2) Those who are overburdened depreciating Assets
3) Those who take risks beyond the capabilities

All 3 of types are trying to reduce costs whilst re-negotiating prices for live contracts.

No Share is worth holding unless the business has been transformed into a Project Management Company whereby over 65% of the projects are subcontracted to various businesses and therefore reducing the risk whilst maintaining decent profit margins.

Those who invested in Modular Construction and Off Site Prefabrication 2 to 4 years ago will be leading the market by being able to delivery projects faster and with a higher quality standard.

Simply put those whose operating margin is below 10-15% are taking more risk with low reward. The industry is in for huge disruption over the next 4 years.

I could not find any reference to the value of AED474m in Rands in this article, so I had a look at this morning’s exchange rate; It equals roughly R1,950 billion.

The AED (Arab Emirati Dirham) is fixed to the US Dollar at a Rate of AED3.676.

The country is in a peculiar position in that China are investing heavily whilst also bring in Tourists and their own businesses whilst the US is responsible for the various Peace Keeping Missions / Wars and also having many business partake in the economy.

It is going to Either be really good or really bad when they are forced to pick sides if they have to.

If they have to then the value of the AED will in all likelihood drop significantly as the economy is not 1st World even though it is geared towards being in the position in the next 30 years.

Thank you. I see the article has been updated.

Is anyone thinking of selling their M&R shares?

End of comments.

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