New Market Rigging Scandal Tangles Up Already Teetering Construction Giants in Europe

Italian and Spanish construction companies with global projects on the brink or over the brink.

By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.

The golden age is long over for Europe’s construction companies. In the wake of the longest recession of the postwar era, their two largest sources of finance — governments and banks — are either unable or unwilling to spend or lend, leaving many once-thriving companies on the brink.

Last July, the Spanish building firm Isolux Corsan declared bankruptcy, leaving 3,884 workers and 119 global construction projects in the lurch. Seven months after its collapse, the bankruptcy receivers announced that the group’s total had €4 billion more in debt than previously disclosed.

At the beginning of this year it was UK outsourcing giant Carillion to file for liquidation after failing to secure a government bailout, leaving bank lenders and bondholders holding a bag containing 1.6 billion pounds ($2.1 billion) of virtually worthless debt.

This is one of the inevitable problems that arise whenever a large construction firm collapses: It leaves large holes on banks’ balance sheets. Banks in Italy are owed €102 billion by the construction industry, which accounts for the highest default rates in the country, reports Bloomberg. With Astaldi SpA readying plans to restructure as much as €2.5 billion of debt, three of the top six Italian builders are now either insolvent or negotiating with creditors.

In Spain one company that is setting off alarm bells is the debt-laden, scandal-tarnished OHL, which is on the verge of becoming a penny stock after its share price plunged nearly 80% year-to-date, about half of it over the past six months, to €1.24 on Wednesday. Four years ago, the shares were worth €17 a piece.

The firm’s problems began in earnest in the first half of 2016, when it reported its worst ever half-year results. OHL’s profits shrank 94% during the six-month period, leading to the firm’s removal from Spain’s benchmark index, the IBEX 35, due to insufficient capitalization.

One of the biggest factors in the company’s decline was its steady loss of international contracts. Since the collapse of Spain’s real estate sector in 2008-09, opportunities for large construction firms in the once-abundant home market had run dry. The ability to survive the new reality hinged on firms’ ability to carve out new opportunities abroad. This is something OHL excelled at, winning prestigious construction and infrastructure projects all over the world, from Montreal to Mecca, from Mexico to Manila.

But by 2016 things had soured, particularly in the Middle East. Qatar terminated a contract worth €1.1 billion for the construction of two metro stations in Doha, citing an apparent “failure to fulfill certain contractual obligations.” OHL was also closely involved in the initially highly prestigious but ultimately financially disastrous project to build a high-speed rail line from Medina to Mecca, which was finally inaugurated last month, six years behind schedule.

The company also faced a bribery and price-rigging scandal in Mexico, one of its most lucrative markets. At one point it paid lawyers and auditors from all of the “Big Four” firms — Deloitte (its long-time auditor), KPMG, PwC and Ernst & Young — to vouch for its innocence. That didn’t stop Mexico’s securities authority from finding the company guilty of a series of violations of stock market laws and slapping the firm with the biggest fine in its history.

To provide some respite to its creditors and shareholders as well as keep the bailiffs off its back, OHL has pawned many of its most valuable assets, including its concession unit to the Australian investment fund FMI. But the bleeding continues.

At the end of September it reported shrinking sales and revenues for the first half of this year as well as losses of €843 million, due largely to cost overruns across a number of projects as well as the loss of its highly profitable concessions business. On that day its shares plunged 23%.

And the financial pressures continue to mount. In September Credit Agricole, Santander, HSBC and Deutsche Bank kindly reminded Grupo Villar Mir, the family business that owns 51% of OHL’s shares, that the company has short-term debt obligations worth some €500 million. Shortly after, the company was in contact with China State Construction Engineering, one of the world’s largest contractors, over potentially selling a stake.

But even that desperate ruse may have been nipped in the bud by the emergence last week of another major scandal implicating OHL. On Thursday, Spain’s National Market and Competition Commission accused the company of colluding with six other major construction firms, Acciona, Corsán-Corviam (part of Grupo Isolux Corsán), Dragados (ACS), (Carlos Slim-owned) FCC, Ferrovial, OHL and Sacyr, to rig the bidding processes for major public projects throughout Spain.

Following a series of inspections, the watchdog believes “there is compelling evidence” of the existence of “agreements and information sharing” between these seven construction firms with the goal of “restricting competition” in public tenders for the construction and rehabilitation of infrastructures and buildings.

Given the mind-boggling scale and scope of the corruption unearthed in Spain in recent years, the fact that seven of the country’ largest construction firms now stand accused of operating an informal cartel that made it much more difficult for smaller, less connected firms to compete for public tender projects should come as little surprise.

It’s not clear what the eventual outcome of the investigation will be, or what kind of punishment, if any, will be meted out if the seven companies are found guilty. But for OHL, a company so close to the brink of financial collapse and desperately trying to attract outside investors in order to keep servicing its debt, the added uncertainty and reputational damage resulting from the new scandal may well be punishment enough.  By Don Quijones.

BlackRock is “a market power that no state can control anymore.” Read…  Why’s the World’s Biggest Asset Manager Advising the ECB on the Health of EU Banks?

Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:

Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.

  19 comments for “New Market Rigging Scandal Tangles Up Already Teetering Construction Giants in Europe

  1. A tome for those who contend the market no longer dispenses justice. Further proof that when the EU bails out marginal economies they are bailing out the entire global system. Can the EU do a forced restructuring on a Spanish company, much less one of their banks? Not sure it is corruption when easy money is offered on a silver platter, if you don’t take all you can another company will and underbid you.

    • Unamused says:

      Like it or not, it is further evidence that capitalism is inherently suicidal when unconstrained by proper regulation. Like any engine, it must be equipped with the equivalents of flywheels or throttles to prevent it from flying apart, even though it wars against any limitation.

      The goal should be to achieve sustainability. The necessity to dispense justice seems to indicate that controls are inadequate, absent, broken, or evaded.

      I’ll get off my soapbox now.

      • Javert Chip says:


        Strongly agree; in fact, no “-ism” can survive without some regulation. Trick is to make sure the regulators aren’t in on the scam.

  2. Beverley L Kennedy says:

    Meanwhile back in ,N America. -I would be some what leery of companies formerly under the too big too fail and enhanced reporting requirement who have been allowed to lighten up since they are no longer deemed too big to fail…etc as when inevitably the cavalry is requested none will appear

  3. Javert Chip says:

    Oh No!

    Corrupt construction companies & corrupt banks!

    In Italy & Spain?

    Say it ain’t so!

    Italy & Spain banking rule #1: whomever they lend to won’t pay it back.

    Italy & Spain banking rule #2: banks know this and don’t care

  4. Crysangle says:

    The various cartels had a communication problem, so they invented a language called fiat.

  5. MC01 says:

    Intriguingly enough the major media outlets in Italy and Spain are downplaying news of OHL’s shenanigans and trying hard to ignore Astaldi’s debt restructuring deal which will end up with our local banks eating a whole lot of losses.

    To give an idea of why the Italian and Spanish real estate and construction sectors will never cause big problems to local banks, I present to Wolf Street readers this evidence.

    This is Argentera, on the Italian Alps near the French border. It was a small town living off the local silver mine (hence the name: argento = silver) until the mine closed down in the 50’s and people started to move. Population went from a peak of 2,500 in 1954 to the present 78. A ghost town in the making.
    A few years ago somebody had this genius idea that Argentera had not enough empty houses, and found a bank willing to listen to him. The city council was only too happy to get some quick cash to throw down the drain and this absurdity was built.
    In 2016 everything stopped, the construction equipment was hauled away and the houses fenced. But there’s still a giant “For Sale” sign down the road: you can buy your piece of European real estate insanity, no doubt for the typical Italian/Spanish inflated price.
    It’s the same everywhere: the other day I was coming home and counted five construction cranes in just one km right next to a double carriageway.

    Think about this: somewhere people from a bank already neck deep in such loans greenlighted yet another purely speculative if not downright fraudulent project (ever heard of overinvoicing? ;-)) knowing fully well the hopes of ever being repaid in full are next to nothing.
    Banks such as Intesa Sanpaolo are so loaded with real estate they obtained during debt restructuring and bankruptcy procedures they have no idea what to do with them but dumping it on the market, causing newspapers to lament “the market for existing houses keeps on worsening”… yet the escavators and construction cranes are hard at work, including next my once peaceful, in the middle of the woods abode. Yet another purely speculative project: what we don’t lack here are empty houses.
    And there will be another shortly, albeit I’d love to stay around long around to see these people handed their due.

  6. R Davis says:

    “trying to attract outside investors in order to keep servicing its debt”
    Is anyone that brave ??

    • MC01 says:

      As usual, if the yield is high enough to reflect the risk I would be ready to consider the opportunity, and I am willing to bet many many others would be ready as well.
      But presently the highest coupon OHL offers is 7.625% on an issue coming due March 2020. Nowhere near enough for a company rated B3/B-.

      They’ll have to do better than this to lure me in, but unfortunately the world is full of institutional investors so desperate for yield they’ll probably be able to lock in a 5-6% for the next eight years issue, which seem to be their standard maturity.
      In eight years OHL may still exist (stealth bailout?), but debt restructuring is very likely, meaning a lot people will have to eat a whole lot of losses.
      Still worth 5-6%?

  7. R Davis says:

    Is it possible that these companies were stuck in a, good times, time warp ??
    At some point one has to take a good look around & size up the potential in the marketplace – what was there yesterday is barely visible today.
    That their eyes were bigger than their capacity to eat.
    Who has a job today – not many – what does this mean – it means that the cash is not there – to buy – to rent – to participate – no money – no customers.
    After 2008 & the EU introduced austerity – isn’t this a signal to everyone to tread carefully – that anything beyond a modest stride is a risktake mistake.
    Nothing is too big to fall – hey !!
    Great Article
    Thank You.

  8. R Davis says:

    regarding the Middle East as a potential –
    Dubai is a failed property development site.
    After the tall towers fires – the UK papers wrote to the effect – Brit’s – who are the main visitors to Dubai – take their lives in their hands even entering any of the building in Dubai.
    Please tell me WHO in their right mind would purchase property in Dubai after that write up ??

  9. R Davis says:

    The Piers Morgan promotional video of Dubai as a phenomenal place to invest – told us – about 10 minutes into the video – that in only 10 year Dubai will no longer have oil = that the wells were running dry.
    Alarm bell should have been heard by potential investors.
    “run, run, run”

    • Crysangle says:

      Dubai was not founded on oil, it is (going on was in some cases) a relatively lenient and neutral, business friendly, international hub. It’s investment structure is/was the building up of that position. That does not make it still a good investment. Not only is political instability on the rise, but the whole theme is now a bit overdone, with various other projects in different countries of the region set to compete. A lot of challenges ahead, but unless you are actually taking part in those and have a reason to be in the region, I don’t think investment in Dubai realty is too wise…maybe for some kind of diversification, but the potential for losses is very real.

      • Auld Kodjer says:

        More regional hubba hubba than international hub.

        What goes on in Dubai (alcohol and Russian hookers) stays in Dubai.

  10. Crysangle says:

    Slightly related is today Spanish banks lost between 2 and near 7 % on a ruling that they are retroactively responsible for taxes during mortgage creation, that were previously assigned to the mortgage taker.

  11. EcuadorExpat says:

    Its not an Economic crisis, Its a crisis of morality. Back in the day bankers were always in the top 5 of trusted occupations.

    Now they cannot even keep a set of honest books much make loans to borrowers that are properly screened with real collateral. In both Europe and the USA, bank deposits are not the property of the depositor, they are considered loans to the banks to do whatever they want with them. This applies to brokerage accounts as well. They lose your money, you get in line with the creditors of the bank, and believe me the individual depositor is at the end of that settlement process.

    But then everybody in the world wants to get rich(er) by sitting on their asses and intelligently moving their assets. Screw the idea that in order to actually make money it is necessary to actually produce something besides paper and electrons. So the crisis of morality has now moved down through the population.

  12. Leo says:

    I was in Spain, and one thing shocked me. I was walking on the street in Madrid and almost every building I saw was a bank. There are just way too many banks. I have never seen so many. If there are too many banks, you know a financial crisis is coming.

Comments are closed.