35.4.1 A robustly-structured project will help to minimise the impact of Contractor distress on users and on the Authority's own finances. It is nevertheless important that Authorities recognise signs of Contractor distress as early as possible.
35.4.2 At a general level indicators of Contractor distress include:
• reports in the media concerning the deterioration of a company's financial health;
• annual accounts showing deteriorating finances;
• profit warnings issued by, or erratic share price movements relating to, corporate entitles involved in the Project such as shareholders, Sub-Contractors or their related companies; and
• a downgrade in the crediting rating of a shareholder, Sub-Contractor or related company's credit rating.
35.4.3 At project level, indicators of Contractor distress include:
- Delay in works - Reduced or minimal site activity resulting in the programme of works being delayed (for example a failure to meet interim or final construction milestones).
- Late payment/failure to pay - Late payment or failure to pay sub-contractors of the Sub-Contractor whether during the construction or operation phase. There may of course be other reasons for non-payment, such as a genuine dispute regarding payment. In such circumstances the Authority should check whether there has been a history of late or non-payment. The Authority should seek to corroborate whether the issues arising within its project are arising on other projects being developed by the same Contractor.
- Performance issues within the Contract - Regular Service underperformance, particularly where the performance relates to matters that require a potentially large amount of capital expenditure such as obligations relating to lifecycle maintenance or rectification of snagging issues.
- Increase in disputes - Financial distress may cause the Contractor to take a more formal contractual approach to its relationship with the Authority; this may manifest itself in established working methods between the Contract and the Authority being changed so that, for example, additional payments are required for Services which were historically regarded as being within the agreed Services specification. Authorities may also see an increase in referrals to dispute resolution procedures or litigation.
- Staff changes - Unexpected staff changes (particularly senior management), especially where this is also occurring on other projects where the Contractor is involved. Further indicators of distress may include where staff are replaced by workers who are on short term contracts (such as consultants) or headcount of staff is reduced.
- Breaches under Financing Agreements - failure to pay amounts due under the Senior Financing Agreements or the financial agreements entered into by a shareholder or a Sub-Contractor. The extent and frequency of the non-payment will need to be considered so as to get a clearer indication of the degree of financial difficulties.
- Restructuring proposals - proposals to restructure/refinance the Project (although such proposals might be inspired by a range of financial or operational drivers). This is particularly apparent where the transaction is presented as a 'rescue refinancing', in which case the Authority may not have the same consent rights which it would have for a non-rescue refinancing - see Section 34 (Refinancing). More generally, whilst financial restructuring can be complex, the Authority should be aware of restructuring motivated by a lack of resources (evidenced for example by a request from the Contractor for additional resources or a relaxation of the payment mechanism).
35.4.5 Where review against the above, and any other indicators identified by an Authority, indicates that there is Contractor distress, the Authority should consider: how significant the distress, how it is being approached by the Contractor, and what further information the Authority might seek from the Contractor or elsewhere.