Carillion shares in free-fall after it reveals more misery

Beleaguered Carillion has braced investors to expect further misery after revealing that efforts to stabilise the embattled business by the end of the year have failed and profits were likely to be lower than even previously expected.

It said a delay in receiving contract revenues and cost-cutting measures not delivering sufficient funding meant it faced breaching financial covenants on December 31, 2017.

The announcement had a devastating impact on the company’s already weakened position, with shares dropping by more than 50% on opening. Its share price plummeted to 17p – more than 90% below its value in July before its crisis began – valuing the global organisation at around £70m. Its shares rallied slightly, but were still down by one-third at 28p at 10am.

In a trading update today, it said its intention was now to defer the testing of its financial covenants until April 30 next year, by which time it hoped it would be partially back on its feet.

Since July, the Wolverhampton group has been focused on reducing costs, collecting cash, executing its disposals programme and implementing its new operating model.

It said these self-help measures would serve to reduce the group’s average net debt over time, but they would not be sufficient to enable it to achieve its target net debt to EBITDA ratio of between 1.0 to 1.5 times by the end of 2018.

“The board is therefore in discussions with stakeholders regarding a broad range of options to further reduce net debt and repair and strengthen the group’s balance sheet,” it said.

“This will require some form of recapitalisation, which could involve a restructuring of the balance sheet. The board expects to commence steps to implement the chosen option during the first quarter of 2018 and a further announcement will be made in due course.”

In its interim results on September 29, the company had forecast it remained on target to meet its financial covenants as of year-end.

It said this was dependent on achieving its underlying forecasts, which assumed that the normal pattern of receipts and payments would continue in November and December, alongside the completion of a number of PPP disposals and settlement receipts on contracts.

However, it said these would now slip beyond December 31, 2017.

“The group expects that a combination of delays to certain PPP disposals, a slippage in the commencement date of a significant project in the Middle East and lower than expected margin improvements across a small number of UK Support Services contracts, partially offset by cost savings initiatives realised in the fourth quarter, will lead to profits for the year to December 31, 2017 being materially lower than current market expectations,” it said.

“Given the impact of delays in receipts and disposals, the group now expects full year average net borrowing in 2017 to be between £875m and £925m.”

It added: “Based on latest forecasts, the board now expects a covenant breach as at December 31, 2017.  Following discussions with its principal lenders and with their support, the board has concluded that it is necessary to amend the relevant agreements to defer the test date for both its financial covenants from December 31, 2017 to April 30, 2018 (based on EBITDA for the 12 months to that date), by which time it expects to be implementing its recapitalisation plan.”

It said efforts to seek the necessary consents for the amendment were now taking place.

Keith Cochrane, Interim Chief Executive, said: “Whilst we continue to target cash collections, reduce costs, execute disposals and focus on delivering for our customers, it is clear that significant challenges remain and more needs to be done to reduce net debt and rebuild the balance sheet.

“Constructive dialogue is continuing with our financial stakeholders, and I am grateful for their support.  I remain focused on addressing this issue before my successor, Andrew Davies, takes up the role on April 2, 2018.”