Carillion’s shareholders and creditors should take the biggest hit if the government is forced to step in to rescue one of its biggest contractors, Vince Cable, Liberal Democrat leader, said on Saturday, as the company fought for survival.
Sir Vince said it would not be acceptable for the taxpayer to simply bailout the company, drawing parallels with the 2008 rescue of the banks where “profits were privatised and the government nationalised the losses”.
Whitehall officials will work with the company and creditors through the weekend to try to agree a rescue package before the markets open on Monday.
The Lib Dem leader’s intervention suggests the crisis at Carillion is about to become highly political; Sir Vince claimed last November that the government was “feeding” contracts to the company to try to keep it alive.
On Friday lenders to Carillion dismissed the company’s rescue plan and urged Downing Street to intervene.
But ministers will face fierce political criticism if they have to bailout a company which continued to receive major public contracts — including on the HS2 high speed rail line — after it issued a profit warning last July.
The government would also have to comply with EU state aid rules, but Sir Vince said that in the first instance the private sector should take a hit.
“The shareholders of the company are going to have to take a loss,” he told the BBC. “The creditors, the big banks who hold most of this debt, will have to write off some of it, perhaps replace some of it with shares.”
The Wolverhampton-based construction and management group, which employs 43,000 people worldwide including 19,000 in the UK, has been struggling to reverse its fortunes after racking up at least £900m in debts and a £600m pension deficit.
Its latest effort, a business plan presented on Wednesday to its banks was rebuffed as “too optimistic”, according to people involved in the negotiations. The banks are being co-ordinated by Barclays, Santander, Lloyds Banking Group, Royal Bank of Scotland and HSBC.
After warning that the company’s plan to return to a stable footing was based on unrealistic assumptions, the banks called on the government to step in, with some seeking a taxpayer guarantee for the company’s debt.
This prompted fresh talks that stretched late into Friday evening between the company, the Cabinet Office, the Pensions Regulator, pension scheme trustees and the Pension Protection Fund in a search for a solution.
Both the Pension Protection Fund and Regulator could prove a stumbling block for any rescue plan to keep Carillion afloat. Struggling companies can negotiate with the Regulator to offload their pension liabilities to the industry lifeboat fund without the usual requirement to declare insolvency first. But these deals are rarely approved by the Regulator with a troubled business typically expected to make a cash injection into the pension scheme before it is offloaded into the Pension Protection Fund.
“We need reassurance from the government if [Carillion] are to remain a going concern,” said one person briefed on the creditors’ decision. “There are things the government can do short of a nationalisation around some of the contracts and the pension fund.”
Carillion insisted its plan had not been rejected outright, noting in a statement on Friday that “conversations with financial creditors and other key stakeholders are continuing”. Its shares fell sharply to 14.2p, taking its drop since a July profits warning to 93 per cent.h3">
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The company said it expected to raise capital by converting debt into equity and is in talks to raise additional short-term financing. But with cash haemorrhaging and concerns that financial uncertainty will stall the award of fresh contracts, banks are only expected to agree to a swap and new loans if they believe Carillion has a viable future.
The government’s role is complicated by its reliance on the contractor for a wide range of services: the maintenance of military bases; school meal provision; work on some of the UK’s highest-profile public works projects, including the HS2 high-speed rail line.
In a sign of the government’s concern, one person involved in the negotiations said it had hired a 50-strong team from PwC to advise on options. Theresa May, the prime minister, has been briefed and ministers met to put together contingency plans, which are said to have been in preparation for weeks. Downing Street declined to comment on whether it would bail out the company, saying the talks were “market-sensitive”.
“As Carillion is a major supplier to government, it should come as no surprise that we are carefully monitoring the situation while working to ensure our contingency plans are robust,” the Cabinet Office said.
The banks are pressing the government to ensure the company has enough cash flow to continue to pay suppliers amid concerns the situation could continue to deteriorate. They also want to be given assurances that Carillion will be allowed to compete for future contracts despite the company’s troubled state.
“There is an eye-watering amount of money disappearing out the door,” said one person briefed on the rescue talks.
Trade credit insurers including Euler Hermes have started to pull their support from Carillion because of its financial problems. Trade credit insurance pays out to a company’s suppliers when it stops paying its bills. Credit insurers keep a watchful eye on creditworthiness and their withdrawal can be a sign the company is in trouble.
Euler Hermes, whose decision was first reported by Insurance Insider, declined to comment. The Allianz-controlled company is one of the world’s biggest trade credit insurers.
Any government rescue of Carillion would be highly controversial, with Labour demanding to know why ministers continued to sign off major contracts with the company even after it issued a profit warning in July 2017.
Shadow business secretary Rebecca Long-Bailey, said: “The collapse of Carillion could provoke a serious crisis.” She said the government had to “bring these contracts back into public control, stabilise the situation and safeguard our public services”.
The Department of Transport said that HS2 Ltd, which is building the new high-speed line “carried out additional due diligence” before letting new contracts to the company. Carillion is part of a consortium involving Britain’s Keir and France’s Eiffage working on the project.
The government also gave the struggling company more work maintaining military bases, where it is already the biggest manager for the Ministry of Defence. Carillion had already agreed an extension with lenders to avoid breaching banking covenants, but its cash position has continued to worsen.
Any agreement to ensure its future survival faces multiple obstacles in part because of the large number of stakeholders often with conflicting interests. There are 18 banks overall and five banks on the co-ordinating committee of the five biggest UK lenders.
There are also 14 different pension schemes, of which 13 are in the UK; one is in Canada. Companies in difficulty have at times been able to negotiate with the regulator to shed their pension liabilities and keep trading.
Carillion has been struggling for survival since last July, when soaring debts and huge writedowns on the value of several old contracts sparked the first in a series of profit warnings and the departure of its chief executive.
Carillion was hit by cost overruns and delays on three government contracts: the £350m Midland Metropolitan Hospital in Birmingham, the £335m Royal Liverpool University Hospital and the £745m Aberdeen bypass.
Questions have also been asked by analysts over accounting practices in the industry, including how early companies record profits on long-term contracts, which can affect how much they can borrow.
The group is also being investigated by the Financial Conduct Authority over financial statements it issued in the run-up to July’s profit warning.
Last month, Carillion brought forward the start date for new chief executive Andrew Davies to January 22. Unite, Britain’s biggest trade union, urged ministers to consider “all possible options”, including stripping the company of all its contracts.
Additional reporting by Madison Marriage and Josephine Cumbo
Carillion’s major contracts
From school meals to digital surveillance, the UK public sector relies on stricken outsourcer Carillion for an array of sensitive and essential services, writes Naomi Rovnick.
Defence and security
Carillion designed, built and maintains the building housing GCHQ, the government’s digital surveillance agency.
The group manages and maintains the Ministry of Defence’s Northwood Estate, the home of the British military’s Permanent Joint Headquarters, which is responsible for planning and executing UK-led joint and multinational operations.
It is also building £1.1bn worth of new accommodation for troops — alongside joint venture partner KBR — at locations including Salisbury Plain, the UK’s largest military training estate.
Carillion recently won £1.4bn worth of construction contracts — with partners Eiffage and Kier Group — for the first section of the UK’s new HS2 high-speed rail route, which will run from London to Birmingham.
The group is also involved in an estimated £745m project with partners Galliford Try and Balfour Beatty to build the Aberdeen Western Peripheral Route, a bypass that aims to significantly improve the ease of travelling in north east Scotland
Health and education
Carillion’s catering arm delivers more than 32,000 school meals in the UK each day.
It also has a £335m contract to build the new Royal Liverpool University Hospital, which has said it has been assured by Carillion that its financial situation will have no impact on the project.
Source : https://www.ft.com/content/e9f0f06c-f7b4-11e7-88f7-5465a6ce1a002000