Register to get unlimited Level 2

Carillion tumbles as it warns on profits again, says it will breach covenants

By Michele Maatouk

Date: Friday 17 Nov 2017

Carillion tumbles as it warns on profits again, says it will breach covenants

(ShareCast News) - Carillion warned on Friday that full-year profits will be "materially lower" than current market expectations and that it now expects to breach its covenants.
The construction and outsourcing company said a combination of delays to certain Public Private Partnership disposals, a slippage in the start date of a significant project in the Middle East and lower than expected margin improvements across a small number of UK Support Services contracts mean profits for the year to 31 December will fall short.

In addition, given the impact of delays in receipts and disposals, it now expects full year average net borrowing in 2017 to be between £875m and £925m. After reporting a £1.15bn loss in September, it had said that full-year average net debt was expected to be between £825m and £850m.

The company also said that following discussions with its principal lenders it is necessary to amend the relevant agreements to defer the test date for both its financial covenants from 31 December 2017 to 30 April 2018, by which time it expects to be implementing its recapitalisation plan.

Interim chief executive Keith Cochrane said: "Whilst we continue to target cash collections, reduce costs, execute disposals and focus on delivering for our customers, it is clear that significant challenges remain and more needs to be done to reduce net debt and rebuild the balance sheet.

"Constructive dialogue is continuing with our financial stakeholders, and I am grateful for their support. I remain focused on addressing this issue before my successor, Andrew Davies, takes up the role on 2 April 2018."

Carillion pointed out that it has been focused on reducing costs, collecting cash, executing its disposals programme and implementing its new operating model since July. While these self-help measures will reduce average net debt over time, they won't be sufficient to enable the group achieve its target net debt to EBITDA ratio of between 1.0 to 1.5 times by the end of next year.

As a result, it is in discussions with stakeholders regarding a range of options to further cut net debt and repair the balance sheet. This will require some form of recapitalisation, which could involve a restructuring of the balance sheet.

Neil Wilson, senior market analyst at ETX Capital, said: "Some investors might think this is the end, but Carillion is too big to fail. Government intervention is possible but this is a nightmare for ministers at such a sensitive moment for the economy.

"Disposals haven't gone as quick as forecast, a big Middle East contract is delayed and margin improvements in UK services contracts have been less than expected. All of which is hardly a major surprise to those watching the meltdown from the side lines.

"It was always a huge ask to get the house in order by the end of the year and it looks like, as we suggested in September ahead of the interims, any turnaround strategy would be too little, too late. Market cap is now £180m and will be even lower by the end of today, which will make the recapitalisation that much harder - an announcement is coming."

Nicholas Hyett, equity analyst at Hargreaves Lansdown, said: "The Carillion horror show continues. Some sort of recapitalisation was inevitable, but a possible debt for equity swap, with debt even higher than the group had anticipated, is probably as bad as anyone would have guessed.

"The group has made some progress on asset sales, and it sounds like some cost savings are being made. It's not what the group expected though, and it's clearly not enough. It's also probably irrelevant given the state of the balance sheet, with net debt already many multiples of the group's market capitalisation."

At 0810 GMT, the shares were down 64% to 15p.


Email this article to a friend

or share it with one of these popular networks:

Top of Page