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Interserve crashes to new low as banks discuss debt swap

By Oliver Haill

Date: Monday 10 Dec 2018

Interserve crashes to new low as banks discuss debt swap

(Sharecast News) - Interserve said it was in talks with its banks about converting a "substantial proportion" of its debt pile into new equity, sending its shares crashing more than 70% on Monday morning.
The government contractor said it would announce its finalised deleveraging plan, which will be subject to shareholder approval, in early 2019.

In a statement initially released on Sunday night and as a Monday morning's regulatory news announcement, Interserve said the discussions were about putting in place a deleveraging plan that would bring the company's net debt down to roughly 1.5 times earnings before interest, tax, depreciation and amortisation. With EBITDA first half £60m that means something around £150m in net debt

Last month, after incurring some financial penalties due to delays completing energy-from-waste projects, net debt was revealed as likely to end the year at £625-650m, worse than the £575-600m guidance given at the half-year results.

The Reading-headquartered construction and outsourcing services group, which employs around more than 50,000 people in the UK among a global headcount of around 75,000, said the arrangements being discussed with its lenders included extending the maturity dates and repayment profiles of its existing bank facilities. A refinancing in April secured committed borrowing facilities of £834m.

The statement said: "Although the form of the deleveraging plan remains to be finalised, it is likely to involve the conversion of a substantial proportion of the group's external borrowings into new equity, an element of which may be sold to existing shareholders and potentially other investors."

Such a debt-to-equity conversion could result in "material dilution" for current Interserve shareholders.

SUPPORT FROM LENDERS AND GOVERNMENT

Chief executive Debbie White, who said that the business continues to trade in line with expectations for the 2018 financial year, said lenders were "supportive of the deleveraging plan" and that the Cabinet Office has also "expressed full support for the work we are doing to implement our long term recovery plan".

She added: "The fundamentals of our business remain strong. The deleveraging plan will give Interserve a strong long term capital structure and provide a solid foundation on which to build the future success of the group."

With Interserve a major government contractor, serving the Department for Work and Pensions, Ministry of Defence and many others, the Labour party demanded that the company face a temporary ban from bidding for public contracts until the debt talks are concluded.

After fellow government contractor Carillion collapsed in January, a factor that had piled extra pressure on Interserve, Jon Trickett MP, the shadow minister for the Cabinet Office, called for the government to urgently review all existing contracts with Interserve are reviewed.

He said he had been told by the Cabinet Office within the last fortnight that it "[does] not believe that any strategic supplier is in a similar situation to Carillion". This has been the Cabinet Office position for at least the last year.

On Monday, Interserve announced that it has been awarded a £25m contract linked to the Welsh government. The company won a place on the next phase of the £36m redevelopment of Prince Charles Hospital in Merthyr, with works due to start on the project in December 2018.

SHARES SLUMP TO NEW LOW

Interserve shares, having already lost three quarters of their value since the start of the year, crashed another 71% to 7p in early trading on Monday.

With the announcement coming only a few weeks after another UK construction group, Kier, announced a rights issue to reduce its net debt after it experienced difficulties obtaining additional credit from banks, broker Liberum said: "While trading is in line we believe that it is hard for Interserve to get credit insurance or win new contacts, given the current environment and its leverage."

Analysts at Peel Hunt said the deleveraging arrangements imply a reduction in ND of circa £350m versus the Friday's closing market cap of £40m.

Neil Wilson at Markets.com said the target of net debt at no more than 1.5x EBITDA, based on the first half £60m EBITDA, "means something around £150m in net debt".

He added: "With more than £400m in deleveraging for a company with a market cap of around £10m, it's fair to say existing shareholders face wipeout, but at least the business should struggle on."

AJ Bell's Russ Mould noted that for a huge business with more than 70,000 staff, the company's value by the market at a little over £10m is incongruous, "the kind of valuation typically reserved for smaller businesses which are not yet making any money, not firms generating revenue in the billions".

"In fact, Interserve had arguably got too big, with too many moving parts, and this left it particularly vulnerable when margins came under pressure," he said, adding that like Carillion, Interserve faces the same toxic mix of loss-making contracts and unsustainable borrowings.

"Management are doing their best to reassure that the future of the business is viable - chief executive Debbie White says its 'fundamentals' are 'strong' and this plan will 'provide a solid foundation'. However, the market is likely to remain nervous until the details of the deleveraging effort are revealed and confirmed, something which is planned for early 2019," Mould said.

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