Group Five more exposed after Kpone cancellation

Lenders grant support for liquidity and going concern status.

Bruised Group Five shareholders got further bad news when the struggling construction group disclosed after market close on Friday an increased risk of claims against its $41.5 million retention bond and $2.6 million advance payment bond on the disastrous Kpone power project in Ghana.

At the current exchange rate this amounts to about R610 million in total.

This comes after the group’s Kpone client CenPower Holdings called on performance bonds with HSBC Bank and Standard Chartered Bank to the value of about R900 million following a failed attempt by Group Five to interdict the action by CenPower. This ruling by the High Court in Johannesburg was handed down on November 16.

Read: Group Five loses battle to stop call on bonds

The share price has nosedived against this background and closed at 39c on Friday, down from R1.18 on November 2. A year ago it was trading at R11.97.

The increased risk Group Five announced on Friday follows CenPower informing Group Five that it was terminating its contract. The contract was for the engineering, procurement and construction of the multi-fuel independent power project.­­­

‘Repudiation of contract’

Group Five disputes that CenPower is entitled to terminate the contract and in turn believes that CenPower’s action is “wrongful and constitutes a repudiation of the contract”.

On that basis, Group Five has now notified CenPower that it accepts its repudiation of the contract and has terminated the contract with immediate effect.

Financial institutions must now pay out claims against the performance bonds, and the extent to which they have recourse against Group Five is not clear. However, the group has stated that its lenders have pledged their support in managing any impact that this might have on the group’s already tight liquidity.

The lenders will abide by the creditors’ standstill, which Group Five reached with a consortium of local banks and an insurer earlier this year as part of a R650 million bridging finance agreement. This agreement is expected to terminate in May 2019.

The group states: “Further terms and conditions of this support, including the terms of repayment of any debt, are being finalised with the lenders thus supporting the group’s liquidity and therefore its going concern status.”

At the time, Group Five committed its most precious assets as security for the bridging finance – namely its manufacturing assets, its European investment and concessions business and its European operations and maintenance business.

Read: Group Five sacrifices East European investment to ease liquidity

‘Strong case’

Group Five is adamant that it has a strong case for recovering some of the delay damages and other claims it believes it has against CenPower, and says this will be done through a submission to the International Chamber of Commerce (ICC) in Paris, an apparently quicker process than arbitration.

It expects the first rulings early in 2019.

The group says the termination enables it to proceed with dispute resolution for payment of all amounts due to it under the contract.

The group stated that its legal counsel, which has experience in local and international dispute resolution, “remains of the considered view that the claims have merit and that the group has a reasonable prospect of recovering payment from the client”.

It has advised shareholders to exercise caution when trading in Group Five shares until a further announcement is made.

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