Things have gone from bad to worse for support services giant Carillion (CLLN). Self-help measures announced in July have not been enough to prevent debt mounting further, with management expecting the group to breach its debt covenants at the end of the year. To stay afloat, the group has agreed with its lenders to defer the covenant test date - which was due to take place in December - to the end of April next year.
Management reckons net debt at the end of the year will be between £875m and £925m, up from the £825m and £850m anticipated as recently as October. After failing to collect enough receipts from its contract claims and disposals, management expects profits for the full year to also be materially below market expectations. It cited delays to both PPP disposals and the commencement of a significant Middle Eastern contract, combined with insufficient margin improvements in UK support services contracts. Analysts at Stifel estimated a reduction of around 20 per cent from the previous market consensus of £113m, to around £91m.
Management is considering a broad range of options to improve its balance sheet, but the announcement was clear that recapitalisation is required and restructuring of the balance sheet is possible. The chosen option is likely to be announced in the first quarter of 2018.
Analysts at Applied Value said lenders were likely to be supportive of the company, and stakeholders expected to concede to a “deeply discounted” rights issue in face of the unpalatable alternatives. However, it warned that the company was vulnerable to vulture funds looking to buy up distressed debt on the secondary market, or others with sufficient capital to make a move on the company. Analysts at Stifel reckon a debt-for-equity swap is likely to be high on the board’s agenda.
Just last month the troubled group announced it had sold its healthcare business to Serco (SRP) for £50.1m, but the bulk of the proceeds would be collected during the first half of 2018. That was part of a targeted £300m in disposals by the end of next year.
