Interserve’s (IRV) management announced some rare good news this week when it revealed it had secured new financing, which it hopes will be enough to prevent a Carillion-style collapse. The outsourcer secured facilities of £834m until 2021, including additional cash facilities of £197m and bonding facilities of up to £95m.
Investors had feared Interserve might find itself overwhelmed by its debts after management warned in October last year it might fail to meet the leverage requirement in its financial covenants at the end of 2017. The testing of its covenants has been deferred further to April.
As might be expected, the cost of borrowing has increased and the group now expects to pay around £56m in total interest expenses in 2018. The outsourcer will also issue warrants to the providers of the new cash and bonding facilities, allowing them to buy shares at 10p a share. This would leave the warrant holders with 20 per cent of the post-issue share capital if the options were exercised.
The announcement prompted an uplift in the shares.But the group is not in full recovery mode just yet. Analysts at Peel Hunt speculated as to whether the group might still have to carry out a large debt for equity transfer, diluting the earnings per share (EPS) for existing shareholders. Analysts at both Peel Hunt and Numis cut pre-tax profit and EPS forecasts to account for increased interest costs. The group is also still reviewing its existing contracts – as part of its 'Fit for Growth' programme – and the fallout from exiting its energy from waste business.
