By NEIL HARTNELL
Tribune Business Editor
A major Bahamian contractor suffered more than $1m in operating losses over a four-year period before it collapsed into insolvency due to an “unmanageable liquidity shortfall” in early 2020.
Liquidators for Cavalier Construction, arguably the leading name in Bahamian construction for the previous 64 years, said the company’s ultimate failure stemmed from a combination of factors including an obsolete business model, inability to restructure and absence of any new major projects in the pipeline.
Andrew Davies and Kendrick Christie, the Crowe (Bahamas) accountants and partners, in their first report to the Supreme Court also revealed that the company ran into a cash flow crunch after it was unable to collect so-called “retention payments” from clients it had completed construction projects for.
Retention payments represent monies that are withheld from contractors until a project is finished and/or any defects have been remedied. None of the clients owing such payments are identified in the report, although the liquidators reveal that Cavalier’s last management accounts to end-September 2019 show more than $2.02m in such monies as due to it.
These payments, as well as more than $1.69m due to Cavalier from its parent, the Galaxy Group of Companies, and over $678,000 owed by other companies within the group, give the impression of a seemingly healthy balance sheet ahead of today’s Supreme Court hearing where the liquidators will seek permission to sell-off equipment and vehicles belonging to the contractor and its affiliate, Bobcat Bahamas.
But, while total assets worth $7.604m were showing as at end-September 2019, the liquidators say they are still examining whether much of these can be recovered and if the value attached to them is correct.
“Notwithstanding the above, and based on the work undertaken so far, the joint official liquidators are of the opinion that the company is insolvent but, at this stage, are unable to provide an estimate as to the quantum of the solvency gap,” Messrs Davies and Christie told the Supreme Court.
“At this stage, the joint official liquidators are not in a position to estimate the likely recoveries for many of the assets available owing to their current status and the ongoing pandemic conditions that continue to impact the economy.”
They added that Cavalier’s insolvency materially changed its balance sheet position by crystallising the collective $1.5m-plus claim for severance pay and other benefits owed to Cavalier’s terminated staff, who now rank as the “preferential creditors” behind CIBC FirstCaribbean International Bank (Bahamas).
The bank, with a $570,00 claim, ranks as Cavalier’s secured creditor and heads the queue, with the staff - who account for more than 60 percent of all claims against Cavalier’s estate - next in line and “unsecured creditors” owed a collective $433,574 at the back. Total creditor claims as at January 2021 totalled $2.544m.
The Crowe (Bahamas) partners identify Cavalier’s head office, located on Crawford Street in Oakes Field, as being potentially the greatest and most obvious source of creditor recovery, with its last appraisal by Bahamas Realty in October 2017 valuing the property at $2m. Any proceeds from its sale, though, will first go to paying off CIBC First Caribbean which holds security over it.
Mr Christie, in a January 14, 2021, affidavit seeking the Supreme Court’s permission to place Cavalier’s head office on the market via a realtor, is also seeking the go-ahead to dispose of plant, equipment and vehicles alleged to be valued at just under $220,000 plus $7,500 worth of fuel as well as building materials, office furniture and fixtures. That hearing is due to take place today.
Setting out Cavalier’s history in the run-up to its early 2020 closure, the liquidators said: “Total operational losses for the four-year period ended December 31, 2018, amounted to $1.009m (excluding the $490,875 revaluation uplift on land and buildings in 2017) with a corresponding reduction in total assets from $13.212m as at December 31, 2015, to $9.501m as at December 31, 2018, with a further reduction to $7.604m per the September 30, 2019 management accounts.”
The last set of audited financial statements were for the 2018 calendar year, and Messrs Davies and Christie added: “Gross profit as a percentage of total revenues decreased from 23.8 percent in 2015 to an average of 7.7 percent for the following three full financial years.... Management informed the liquidator that the company had last declared a dividend in 2011-2012.
“Management had attempted to reduce staff costs by instituting a 20 percent reduction in salary for all senior management effective May 2018 in exchange for them accepting an additional day’s vacation per week worked.”
Further signs of potential financial strife were exposed in the financial statements for 2016 and 2017, which disclosed that Cavalier was in breach of its banking covenants with CIBC, although this was remedied in 2018.
With Cavalier enduring “significant reductions in its net asset position” and “mixed operational results”, the joint liquidators said they had thus further uncovered nothing that would contradict the explanation given by management and shareholders for the company’s failure.
They said this had been blamed on “operational changes in the delivery of construction services that have led to the obsolescence of the general contractor as a viable business model in the Bahamian market.
“Larger projects are now, more often than not, carried out under construction management arrangements by developers and owners, who will employ a construction management team, who then sub-contract smaller packages of work to contractors/subcontractors. This effectively cuts out the traditional general contractor out of the market” such as Cavalier.
Among the contributing factors were “a reduction of the amount of work available and won by the company. At the commencement of the liquidation, Cavalier had significantly completed the remaining contracts on its books and had no new work of any significance lined up.
“The company had a number of long-standing employees and, as a result, was unable to restructure effectively by reducing head count due to the financial costs associated with terminating employees under Bahamian employment legislation.”
Besides an inability to find new investors/shareholders, the liquidators also said: “The company had recently been building luxury homes for high net worth individuals, which involved certain complexities to the project they would not expect with commercial projects the company had previously undertaken.”
And there were “challenges the company was experiencing in collecting outstanding retention receivables on projects where the delays were beyond the company’s control. This contributed to an unmanageable shortfall in liquidity that meant the company could no longer effectively trade having exhausted all lines of credit and cash reserves”.