Polish builders' bailout seen as ruse to prop up bank profits

By bne IntelliNews July 25, 2012

Wojciech Kosc in Warsaw -

Rattled by the possible ripple effects of a collapse in the construction sector, the Polish government opened a debate in early July about bailing out certain builders. The stability of the financial sector was a main reason for the bailout plan, but many argue that in reality taxpayers are being asked to support the banks' profitability.

Propelled by the Euro 2012 football championships, Polish construction companies spent the last few years competing for state infrastructure tenders that had price as the prime element. However, those contracts were hit by rises in the cost of materials, and several builders have now gone under. PBG, one of the largest in the country, filed for bankruptcy in late June, and alongside the struggles of its peer Polimex, that has opened this debate in Warsaw over a possible government bailout.

According to analysts, it could take PLN10bn (€2.4bn) in state aid to dig the companies out of their hole - a fair chunk of change for a government scrabbling around for every zloty it can get its hands on to push an ambitious fiscal consolidation drive. Economy Minister Waldemar Pawlak, whose PSL party has a conservative constituency that would suffer should many builders go under, has led the charge.

However, he's also been backed up by the likes of Treasury Minister Mikolaj Budzanowski, who has suggested offering PBG as much as PLN385m in direct aid. That backing likely stems from his role in driving Poland's push for energy independence. For instance, the company developing the country's liquefied natural gas (LNG) terminal on the Baltic coast was forced to insist in mid-July that the troubles at its contractor PBG are not the reason for months of delays.

Still, as the debate goes on, it's become clear that the banks and financial investors are driving many of the headlines. The Association of Polish Banks has been front and centre in urging nationalisation, with the construction sector owing billions of zlotys to the country's lenders.

At the same time, exposure to PBG debt has hit investors hard. In June, Union Investment TFI was forced to suspend redemptions at two of its funds holding the company's debt after investors pulled out as much as 35% of their total value, and other funds have been rocked by similar scares. Equity investors meanwhile have been hit with a drop of over 90% in PBG's share price compared with 12 months earlier.

Surprise, surprise

In a statement, Union Investment claimed PBG's bankruptcy filing took the "entire financial sector by surprise". It shouldn't have. The company - reported to owe Polish banks as much as PLN1bn (€240m) - was already quite clear about the coming storm in its 2011 annual report.

The straw that appears to have broken the camel's back was a refusal by one (unnamed) bank to finance a takeover of Rafako, a boiler manufacturer for the power generation industry. The construction company went ahead anyway, powering the PLN460m deal with its own resources in late 2011. That undercut PBG's liquidity and its ability to win new construction contracts.

According to Andrzej Powierża, a banking analyst at Citigroup's Polish unit, Dom Maklerski Citihandlowy, it's likely that the refusal to extend PBG's credit line to finance the acquisition reflected a banking sector already exhibiting scepticism over the company's financial position.

However, while Union Investment had little choice but to admit its problems over exposure to PBG, the banks remain much more cautious in commenting on the implications. Pekao, Nordea, ING Bank Slaski, and Bank BGZ - all PBG creditors - refused to comment on the impact of the bankruptcy in their quarterly results when contacted by bne. "We cannot comment [on the construction sector] when we're in the last weeks of preparing second-quarter results," Arkadiusz Mierzwa, spokesman at Bank Pekao, said.


It's clear, however, banks that helped drive the infrastructure boom will have to grow their cash reserves in anticipation of write-downs on their assets and loans. "The construction sector is problematic and if bankruptcies spin out of control, it could mean even more write-downs for the banks, not only because of their involvement in construction, but also sectors depending on construction," says Powierza.

After posting record earnings in 2011, when the Polish banks netted PLN15.7bn, the problems in the construction sector are only likely to add to an anticipated drop this year. The National Bank of Poland forecast in July that bank sector profitability would fall 30% by the end of 2014 as a result of bad loan provisions.

However, few see the situation as critical to the stability of the sector. Michal Stalmach, an analyst from Bank BOS, points out that while a slowdown is on the cards, the banks have plenty of options should the situation start to seriously threaten their balance sheets.

They're likely to act swiftly to ease the pressure on creditors in the construction sector. "I expect that it will take difficult negotiations, but eventually bonds will be rolled over and loans renewed," he forecasts. "Debt restructuring will involve having to come to terms with some write downs but the difficult situation in the construction sector will not destabilize the banking business."

The unnamed bank that reportedly helped sink PBG is the exception rather than the rule in the way that banks are going to view construction in the near future, he states. Rather, it will be in the banks' own interests to increase credit to the sector to allow it to grow its way out of trouble. "A decrease in financing of construction companies would weigh down on their ability to take part in tenders and cause further problems," he points out.

Meanwhile, putting the potential problems that the construction sector could cause the banks into perspective, whilst a July report from the National Bank of Poland points out that profitability will suffer, it airs no such concern over stability. That despite the fact that the central bank has been at the forefront of the Polish authorities' push to protect the financial sector through the Eurozone crisis.

Indeed, as Powierza notes, it's outside the country that the most significant risks are looming. "Since many Polish banks are foreign-owned, it's the problems in the foreign banking sectors that could have a really negative impact," he warns.

Yet falling profitability at Polish units is unlikely to shore up those European parents, or help Polish efforts to protect local subsidiary funding.

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