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The bad news continues to compound for Downer EDI (DOW).

The company today was forced to respond through the Australian Securities Exchange (ASX) to claims in the Sydney Morning Herald and The Age that it was deliberately withholding payments to contractors.

The papers claimed the company had attempted to “tart up year-end accounts through aggressive cash management”.

In its rebuttal, the company said it had ample liquidity and expected to pay all contractors within the agreed creditor terms.

Morningstar analyst Peter Esho said that the market is speculating on liquidity issues, while the company's management insists it doesn’t have any.

“At the moment there seems to be a standoff between management and the market - similar to a game of poker,” Esho said.

“The market had built a lot of trust into the stock, which is now rapidly evaporating.”

According to Esho, the real issue surrounds Downer’s mispriced partnership agreement to build a railway for the NSW government in 2006.

Downer’s debt in the partnership is non-recourse but analysts, including Esho, say if the partnership needs to fork out cash for the venture, Downer will also need to contribute. Downer owns 49 per cent of the partnership.

In 2005, the company had experienced a number of problems and in 2006 the government contract was a big boost. “At the time there were concerns that the contract was underpriced and overpromised,” Esho said.

From 2006 to 2010, new business and a new CEO saw past problems fading and the rail contract was not seen as a "game changer".

However, concerns remained that the rail deal had fallen behind schedule, and only last month did management come out and admit the contract had been mispriced - and this broke confidence with the market.

Downer shares were down 6 per cent to $3.75 at 3pm on Tuesday.

Esho believes the sell-off is overdone. "Downer will eventually restore its credentials with the market. The question of when and what damage will be done along the way is less certain," he said.