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Carillion's risk remains high despite funding increase

The troubled support services group has offloaded its healthcare business to one of its peers and increased its credit facilities
October 25, 2017

Carillion (CLLN) has taken action to alleviate its mounting debt problem. The beleaguered support services group has agreed the sale of its UK healthcare facilities business to Serco (SRP) for £50.1m. The proceeds – the bulk of which will be received during the first half of 2018 – are part of the £300m-worth of non-core disposals targeted by the end of next year.

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However, management is reconsidering whether the sale of some of its Canadian businesses – materially the most significant of its planned disposals – would produce the best result for the group, understandable given they generated £537m in revenue last year. On release of Carillion's half-year results in September, management said discussions with a potential purchaser were progressing well, with a view to concluding a deal by the end of the year, but presumably that isn't set in stone.    

Carillion has also managed to secure additional credit facilities of £140m from five of its core lenders. Around £40m of this will mature in April 2018, with the remainder due in January 2019. It has also agreed two £40m bonding facilities with its surety provider. Around £16m in private placement notes falling due in November have also been deferred to January 2019. Repayment of an additional £49m in notes maturing next year may be pushed out to the same date. Pension deficit contributions due during the seven months to March next year have also been deferred to 2019.

These measures will boost Carillion’s committed headroom through 2018 by between £170m and £190m. This is in addition to the £835m in banking facilities in place at the end of June. However, with average net debt expected to be around £825m-£850m for the full year, much more work is needed to achieve its average net debt-to-cash profits ratio of between 1 and 1.5 by the end of 2018.

At the time of the group’s half-year results, analysts at Numis expected net debt at the year-end to come in at more than £1bn. Forecasting a year-on-year decline in cash profits, it estimated a leverage ratio of 2.8 times at the end of December. On that basis, it estimated that net debt would need to be reduced by £670m to achieve a leverage ratio of 1.5 times. That raises the possibility of a capital raising to plug the funding gap.