Rising debts in the construction industry, are you creditworthy?

By Eric Teo – Head of International Practice & Special Projects

In Dubai, it is noticeable that certain commercial and retail activities are beginning to hum again, and hopefully, the rapid pace of vaccination and continued buzz in real estate transactions will stimulate green shoots in the local construction and real estate industry.

But, we must not let our guard down as financial troubles in the industry still linger with rising bounced cheques and debt recovery cases. We regularly hear clients lamenting about bad debts and discovering the front door of their customers’ offices filled with court notices and orders. Besides chasing bad debts, focusing on new business is vital. Question is, how do we know if a new customer is creditworthy (especially if they are a private company)?

In the UAE, unless you are a licensed financial institution, you have very limited means to check on the financial health of a private company (particularly onshore companies) because their audited financial reports are not publicly available. Although the Dubai Chamber of Commerce provides corporate report services on private companies, these reports seldom offer sufficient financial information to be able to gauge the company’s creditworthiness.  Often you will have to engage professionals to carry out due diligence or rely on the company’s willingness to disclose (for example, allowing you to obtain a credit report from Al Etihad Credit Bureau) in order to get meaningful financial information.

Perhaps the Emirates Movable Collateral Register (“EMCR”) might offer some help. The EMCR is an online registry that lists third parties’ security or collateral interests against the movable assets of a company. The register is currently enforced under UAE Federal Law No.4 of 2020 and a new set of regulations was issued in late March 2021 (Cabinet Resolution No.29 of 2021).

The EMCR, which started in 2018, is a significant step taken by the UAE government to help small and medium enterprises (“SME”) to access financing facilities and also to expand the lending market. Typically, for SMEs who might not have substantial financial standing or history, it is difficult for them to secure suitable financing or credit facilities. Hence, the register helps to unlock SME’s movable assets to stand as collateral in return for such facilities. This initiative has helped improve UAE’s score in the World Bank’s Ease of Doing Business study.

In my view, the EMCR does not only help SMEs, it is equally impactful for large companies that operate in the construction industry – an industry where cash flow is crucial. For a company serving the construction industry, movable assets can include equipment, machinery, tools, construction materials, cash deposits and accounts receivables including assignment of future payments. As such, the EMCR becomes an important instrument that can facilitate companies to get better access to factoring or discounting facilities by collateralising their movable assets. For example, assigning the right to receive payments for invoices or payment certificates from a specific project or paymaster in return for an immediate amount of cash discounted at a certain percentage of the invoiced amount. This is a common financing method in the construction industry and is crucial given that the industry has a notoriously long payment cycle.

In the context of this article, what is important is that the basic information provided in EMCR is free and easily accessible to the public (in contrast with registers or records that tracks security or mortgage interests on assets such as real estate, vehicle, aircraft, ship and others). I believe EMCR can provide a useful indication of how much debts a company has, how old they are and how active the company is seeking to securitise its movable assets to generate cash flow, whether company-wide or project-wise.

However, if the company does not have any asset listed in the EMCR that does not necessarily mean it is debt-free. Conversely, having a long list of assets in the EMCR that are charged to lenders does not necessarily mean that the company is debt-laden or in financial trouble as long as they are actively generating revenues.  One could say that having a long list of assets charged to various lenders shows that the company has good assets and ongoing businesses that are creditworthy to lenders. So, one will have to explicate the information in the EMCR based on the respective company’s circumstances. At the minimum, the EMCR can offer some insights about the company and serve as a starting point for an initial credit check. But it is certainly not an instrument to dispense with the need to carry out thorough due diligence on new customers.