JSE-listed Esor’s share price plummeted on Monday by 62.5% as the company announced the start of business rescue proceedings for its Esor Construction subsidiary, which holds the group’s infrastructure, building and housing, pipelines, sanitation and pipe services businesses.

The decision follows after a consortium of financers, with whom Esor Construction had been negotiating, were not prepared to make any funding available outside of a formal business rescue process.

According to the company’s board, the implementation of business rescue proceedings will afford the executive directors of Esor Construction, together with the appointed business rescue practitioners (BRPs), the opportunity to develop and implement a business rescue plan in a manner that will optimise the likelihood of Esor Construction continuing its existence as a going concern.

Hans Klopper and Dawie van der Merwe of BDO Business Restructuring have been nominated as Esor Construction’s BRPs.

Esor Construction is currently financially stressed owing to significant losses incurred on certain construction contracts by Esor Construction in the current and prior financial years, as well as the about R130-million currently owed to creditors and the challenging economic environment currently being experienced in the construction sector.

Additionally, the board noted that Esor Construction’s inability to obtain short and medium-term funding also had an impact.

Various strategies had been implemented to mitigate the negative effects of these, including expediting the completion of the legacy loss-making contracts in order to limit further losses and the consequential cash outflows, as well as the disposal of idle and noncore assets following the strategic positioning of the company to focus on water, sanitation and developments.

The company also implemented strategies in terms of the refinancing of selected vehicles and equipment through vendor financing, which resulted in an inflow of R12.2-million in May. However, the terms of financing are over an 18-month period, and resulted in a reduction in the overdraft facility of R5-million.

Esor Construction also renegotiated payment terms with major suppliers and subcontractors to more closely match the renegotiated outflows with the timing of anticipated future cash inflows, and further ensured that adequate security is provided to the primary bankers to cover the facilities that are made available in terms of the facilities arrangements.

Additionally, ongoing support of guarantee providers to maintain adequate bonding facilities to facilitate successful implementation of contract awards, as well as negotiations to dispose of the certain development land, also took place.

In an effort to realign the resources to workload, the group has started a Section 189 process of anticipated retrenchments that will see the reduction in headcount to align with workload, as well as reducing costs by about R4-million monthly.

The total retrenchment costs, for the period from March to July, amounted to R12.2-million.

Esor Construction is also renegotiating payment terms of the shareholders loan received from its parent company, Geomer Investments.

Esor Construction is the second of South Africa’s construction majors to enter business rescue proceedings this year.

Basil Read in June filed for business rescue as its construction division continued to struggle with cash flow constraints, while the company was also unable to raise bridge financing to finalise certain construction contracts.