A creditors report released for Porter Davis Homes (PDH) reveals the collapsed homebuilder was running at a loss from at least the December quarter of 2021, racking up debts of approximately $557 million of which most is unsecured and is unlikely to be repaid.
The statutory report to creditors released yesterday by liquidators at Grant Thornton shows Porter Davis directors identified a total sum of $481.6 million owing to unsecured creditors across the group, including $71.5 million that has been claimed but ranks below Commonwealth Bank (ASX: CBA), lender Chesapeake and employees on the priority list.
Liquidators expect the Commonwealth Bank will be paid its $32.9 million owed in full, while partial dividends are anticipated for Chesapeake which is owed $24.6 million, and employee priority creditors who are owed more than $18 million.
At the time that Porter Davis appointed liquidators and left thousands of customers in the lurch in March, the group had 466 employees of whom 403 were made redundant.
But staff were technically employed by a subsidiary called PDH Operation that was purely an employing entity and did not actively trade or have any material assets, so liquidators are still working on pinpointing exactly which arm of the conglomerate was the 'true employer'.
Grant Thornton notes the $71.5 million owed to unsecured creditors does not include any amounts that might be claimed by Porter Davis customers due to the group's failure to complete building contracts.
These customers have been classed as 'contingent creditors' in the liquidations for $1 for the purposes of voting and attending the creditors' meeting due to take place on 28 June in Melbourne. Many will not be designated as creditors given they may be eligible to claim a refund of their deposit under the home warranty scheme in Queensland or Victoria, or otherwise under the Victorian government compensation payment scheme.
The liquidators also note there are a number of customers who have received the benefit of substantial works undertaken on their home and who have been invoiced for these works, but have not paid for them.
"Please note, at this stage, it appears unlikely that sufficient funds will be recovered in the liquidations to enable a dividend to be paid to ordinary unsecured creditors," the report's authors state.
"This would require all amounts owing to secured creditors, and priority employee creditors, to be paid in full prior to any distribution to ordinary unsecured creditors. Further updates regarding the progress of the liquidation and the likelihood of any dividends will be communicated in future reports."
Grant Thornton notes the decision was made immediately after its appointment to cease active construction operations at all building sites of the PDH companies because of a lack of available funding to sustain ongoing trading, which would have required a weekly run rate of around $11.5 million in April.
The report highlights labour shortages, productivity issues, and price escalations and availability of materials as contributing factors to the builder's decline.
Supply shortages started affecting the group's companies in May 2021, and were exacerbated between September of that year and April 2022 due to a 'significant material shortage from PDH's sole supplier of framing material.
A new supplier was found but with a reduced volume of frames provided, and by August of 2022 the companies of Porter Davis identified they would not be able to meet their covenants with the CBA, which then engaged KPMG to undertake an independent business review relating to its loan facilities.
In the lead-up to that decision, between December 2021 and June 2022, even at a time when Porter Davis was running at a loss, the former CEO Adrian Hondros increased the head count by 40, which 'significantly increased the overheads of the business'.
"In the period prior to the liquidation, under the new CEO, a process had commenced to restructure and reduce the headcount of the business in order to realign the overhead costs with the overall structure of the business," the liquidators wrote.
In November of 2022, Porter Davis companies encountered some payment issues with suppliers, and 'in or around February 2023' experienced a dispute with a key supplier.
Grant Thornton adds that Porter Davis' construction teams’ forecasting was based on a goods receipting process as opposed to site activity on customer builds, resulting in a focus on cash outflows to meet supplier payments instead of inflows from customers, affecting the the 'drive and reporting on activity to the board'.
When all companies in the group entered liquidation, except Englehart Homes which is still undergoing negotiations for a sale, Porter Davis Group was in the process of building 1,500 homes in Victoria and 200 in Queensland, with a further 770 contracts with customers where building had not yet commenced but often deposits had already been paid. It was later revealed there was a lag between the group receiving deposits and registering customers for state-mandated insurance policies to which they were entitled.
One builder on the shortlist to potentially pick up works on uncompleted homes noted a 'huge price difference' in quotes he was shown by Porter Davis customers versus what he would charge for the same job.
PDH's townhouse business has already been offloaded to Victorian peer Nostra Property Group (NPG) and its intellectual property has been sold to two unnamed 'leading residential builders'.
In an announcement to the ASX today, Simonds Group (ASX: SIO) reported it had commenced completion and rectification works for domestic building insurance claimants, specifically in a 'first wave of customers' from the Porter Davis fall-out starting in June.
"Simonds is pleased to be partnering with the Victorian Managed Insurance Authority as one of their panel builders to assist people to complete their dream home in what has been a challenging time," Simonds executive chairman and CEO Rhett Simonds says.
"We were happy to participate in the independent assessment commissioned by the VMIA which has confirmed Simonds’ financial strength and operational capacity to take on this important work.
"Completing insurance works alongside retail, wholesale and projects will continue to drive our channel diversification strategy and assist in restoring confidence in the residential building industry."
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