Back in November the Department for Transport announced that the East Coast franchise, 90 per cent owned by Stagecoach (SCG) and the remainder by Virgin, would come to an early end in 2020 rather than 2023. Shareholders in Stagecoach were encouraged at the time that this would reduce the risk of the operator defaulting on the franchise. It appears this optimism was premature, as the transport operator has breached a key financial covenant.
Department for Transport minister Chris Grayling said that Stagecoach can only operate the route in its current form “for a matter of a very small number of months and no more”, and will run out of money well before the new 2020 deadline. Since 2015 around £1bn has been returned to the taxpayer, but has cost Stagecoach around £200m, or a fifth of its market value. In the words of Mr Grayling, Stagecoach "overbid and is now paying a price", in yet another example of a public sector contractor over-stretching itself to win contracts.
A significant element of Stagecoach's expected passenger revenue growth and associated payments to the government from 2019 were linked to expanded timetables, reduced journey times and extra services. Significant parts of these improvements will be delayed or not achieved at all.
The operator may have to pay £19m for the failure of its performance bond, and a likely additional non-cash £75m charge relating to franchise assets. Usually these assets are sold to the new operator, though in this case it looks like they’ll be written-off. However, stress tests on Stagecoach’s balance sheet suggest the transport group can deal with these added costs. Net debt to cash profits will likely rise to somewhere around 2.6 times, but that is still below the covenant limit of 3.5 times.
