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Carillion falls into liquidation as lenders pull out

Lenders refuse to provide new funding. Government expected to step in to ensure public sector contracts maintained.

 
Carillion falls into liquidation as lenders pull out
 

Carillion (CLLN), the construction group and leading public sector contractor, has plunged into liquidation after its lenders refused to provide the debt-laden group with £300 million of new funding without government intervention to resolve its financial crisis.

The Wolverhampton-based firm, which employs 43,000 staff around the world, 20,000 in the UK, has been put into the hands of the Official Receiver with PricewaterhouseCoopers appointed as special managers to wind down the business.

Chairman Philip Green said he expected the government to step in and provide the necessary funding to maintain the service contracts on UK roads, hospitals and prisons held by Carillon and to minimise the disruption to its subcontractors and suppliers.

But the decision to liquidate rather than put the business in administration implied there was no value left in Carillion, which was spun out of Tarmac in 1999 before buying builders George Wimpey, Mowlem and Alfred McAlpine.

‘This is a very sad day for Carillion, for our colleagues, suppliers and customers that we have been proud to serve over many years,’ Green said.

‘Over recent months huge efforts have been made to restructure Carillion to deliver its sustainable future and the board is very grateful for the huge efforts made by Keith Cochrane, our executive team and many others who have worked tirelessly over this period. In recent days however we have been unable to secure the funding to support our business plan and it is therefore with the deepest regret that we have arrived at this decision.’ 

With 450 government contracts Carillion covered a huge range of activities, delivering 32,000 school meals a day to running the building of spy centre GCHQ and also being the biggest manager of military bases.

However, cost overruns on a number of contracts in the UK and Middle East saw its debts balloon to around £900 million this year while its pension scheme deficit rose to £580 million.

It issued two profits warnings in 2017 with its market value plunging from £2 billion to £61 million, prompting the Opposition to demand why the government had continued to award it contracts, including involvement in the first stage of the High-Speed (HS2) rail link from London to Birmingham.

It made its first warning on 10 July, a week before it was awarded a £1.4 billion contract on HS2 and a £158 million deal from the Defence Infrastructure Organisation.

A second profits alert on 29 September was followed just over a month later with a transport contract to electrify the London to Corby railway line.

The Financial Conduct Authority had earlier announced plans to investigate the company's stock exchange statements between December 2016 and its first profits warning when it wrote off £845 million from the value of three building projects and its Middle Eastern business.

Labour’s shadow secretary of state for business Rebecca Long-Bailey told the BBC: 'Why did the government not act when profit warnings were issued? Why did they wait until the eleventh hour to step in?’

Government sources have denied it was a mistake to award the contracts to Carillion, saying to have done otherwise would have worsened its problems. 'If we had issued an edict saying they could no longer win any government contracts, that would have made them go belly up. The only option was to carry on as normal,' one aide told the Financial Times.

According to the paper, documents filed at Companies House show that as Carillion's financial situation worsened last year, it took out a £40 million loan secured on its assets with Glas Trust Corporation, a private, London-based lender.

Long-Bailey said Labour wanted the government to take on all the Carillion contracts. 'What we don’t want to see happen is the government to take on those contracts which are making a loss, while those contracts that are profitable are simply sold onto another company. That’s not good enough,’ she said.

On the stock market, the demise of Carillion caused other construction groups to fall, while infrastructure funds that employed the firm as a facilities manager on private finance initiative contracts to maintain schools, hospitals and army barracks, rushed to find replacements. 

Around 28,000 of Carillon’s UK pension schemes will be transferred to the Pension Protection Fund. This will safeguard the pensions of those who are retired but means those who are still working will receive 90% of the pension they would have expected up to a cap.

Tom McPhail of Hargreaves Lansdown said although Carillion’s pension deficit was big, the PPF had a surplus of over £6 billion and was strong enough to cope.

 

 

12 comments so far. Why not have your say?

ROGER HULME

Jan 15, 2018 at 10:12

A left wing female journalist spouting on Sky News Press Preview the other evening stated that the Carillion shareholders had done alright out of this - what a load of tosh! She clearly knew nothing about what had happened over recent years. Why does no-one question such statements?

I am a small shareholder who has lost a five-figure sum. The only winners in this sorry saga are the Hedge Funds who have made millions shorting the shares. Does anyone think that these parasites provide a useful service?

Also, Carillion has been very badly managed. A Rights Issue before the share price collapsed by >90% might have saved them.

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what me, worry?

Jan 15, 2018 at 10:22

Couldnt agree with you more. Ive lost a five figure sum also. There are questions to be answered, if indeed they are ever asked. But, of course, dont expect any restitution.

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what me, worry?

Jan 15, 2018 at 10:23

Couldnt agree with you more. Ive lost a five figure sum also. There are questions to be answered, if indeed they are ever asked. But, of course, dont expect any restitution.

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joseph o neill

Jan 15, 2018 at 12:51

Can't see the point in directing the blame onto hedge funds,the real culprits are the board of directors (especially chairman),who are responsible for deploying capital in an efficient manner,These Muppet's hadn't got a clue what they were doing .Chasing lucrative contracts for their own pockets & power without a thought for their staff,shareholders or the Carillion name, those contracts would then be outsourced ,so in effect the board hadn't' got a clue how these contracts were being managed.these totally selfish, disgraceful, incompetent directors.should never be allowed a position on any board again !!.

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PaulSh

Jan 15, 2018 at 14:02

Jack buys something cheap and sells it back dear and he's the lifeblood of the UK trading economy, but Jill sells something dear and buys it back cheap and she's a parasite not providing any useful service. What's the difference? Actually you could say that Jack is the parasite for reaping the rewards for other people's hard work and Jill is performing a useful service by providing liquidity for an out-of-favour stock for others wanting to sell.

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Law Man

Jan 15, 2018 at 17:53

I lost about £2,000 in capital, selling out at c. 48 pence; but I did receive good dividends for many years.

Last year IC published an article on free cash flow analysis, using Carillion as an example of a weak company. Unfortunately IC continued to rate it a Buy and I hesitated.

My responsibility so no complaints; but the conduct of the directors should be reviewed.

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andrew moffat

Jan 15, 2018 at 19:33

In a strange sort of way, this could be an opportunity. The problem with this company - like too many others in this sector - is that it was bidding for work at dirt cheap prices and many contracts were running at a loss. The same happened at Balfour Beatty a few years ago, until the new CEO took over and he has turned around the company. Now it carefully bids for contracts at decent margins. The shares are still in the recovery phase.

The demise of Carillion suggests that a major competitor, bidding at silly rates, will now cease to create a disorderly market. Rates should strengthen over the next year or two. This could be a buying opportunity for similar firms, including Balfour (although it is taking a one-off hit from the failure), Kier and related companies.

Naturally, one sympathises with the shareholders, including those who have posted messages here.

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ROGER HULME

Jan 15, 2018 at 20:00

PaulSh - I have been investing in the Stock Market for 50 years and have held some of my holdings for up to 30 years. Some shares I hold for a relatively short period - perhaps a few months or 1-2 years - others I have held long-term.

Thankfully the majority of my investments have increased in value and have paid dividends which have increased regularly. You accuse me of reaping the rewards for other peoples hard work but I am taking a risk investing my own hard-earned money and if a company in which I invest is successful then the Directors and Employees will also benefit.

I spent my entire working life working for blue-chip companies in the Chemical, Pharmaceutical, Electronic, Aerospace and Retail sectors so I have some experience of Industry.

Contractors like Carillion, Balfour Beatty etc., bid for contracts at very low margins then look for every opportunity to look for extra revenue from the client. When things go wrong losses soon occur.

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Alex Peard

Jan 15, 2018 at 21:26

I have also lost a five figure sum. I take primary responsibility for my mistake in investing in Carillion. I had been constructing a 'buy &hold' income portfolio and had thought it had a well covered dividend. After the first profit warning I went through the annual accounts and realised this is a very low margin business with a large pension deficit. However, I thought the business was still capable of generating reasonable profits and I held on hoping to get back to break even. I have never been good at crystallising a loss which is why I still hold RBS after 10 years! Hopefully I've learnt the lesson now.

The other thing which disturbed me in their accounts was the low shareholding of the directors. The executive directors held some shares as a result of bonus schemes but held few directly and the non executives very low amounts with two none at all. This is always a bad sign and wIth hindsight I should have sold at 50p then and got some money back.

I understand the directors recent actions are to be investigated, I hope this happens but usually this takes years and never seems to result in any real penalty.

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Hopeless romantic

Jan 20, 2018 at 09:25

What about the Kiers et al - are they beneficiaries of the C failure - or are they going to suffer from confidence issues?

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ROGER HULME

Jan 20, 2018 at 10:48

I've sold my Interserve shares at a considerable loss - better to have something rather than nothing at all!

There was a pointed article about Interserve in the Daily Telegraph this week suggesting they could be the next to go.

Watching my Kier shares very closely and hoping they might be beneficiaries.

Do I put my Interserve proceeds into Keir?

I would very much be up for taking action against Carillion's auditors for negligence.

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andrew moffat

Jan 20, 2018 at 13:31

The Kier situation is interesting. An employee, at a senior level but not Board level, told me just before Christmas that these shares are as cheap as chips, with which I agreed. I am at rather a loss to understand why they are so cheap. His view was that institutional investors have been asking when it will do 'a Carillion'. Thus, it would seem that bad sentiment is responsible. However, Kier is a different species: it has visibility of earnings; it bids for work with margins or not at all; it has double-digit growth forecast each year until 2020, as part of the Board's 2020 strategy.

It is worth viewing the presentation of the last results on their website.

In addition, analysts are bullish, with at least three setting a target price of £16.00.

The shares shot up, a week ago, following the Carillion collapse, by 70-80p, to £11.50. Since then, they have fallen by £1.45 - some 13%, which is astonishing volatility but without any news of substance. In fact, on 15th Jan, Kier issued a statement that the collapse of Carillion would have no ill-effect on the company.

Ordinarily, one would think that the collapse of Carillion would remove a big competitor and one that underbid for contracts. This should be bullish for competitors of C over the coming year, including Kiet.

The company yields over 6.5% (covered 1.6+ times) and must be one of the cheapest shares on the market. It traded at £15 a little less than a year ago, when the problems with C had yet to surface.

Perhaps others, here, could shed some light as to why they think Kier is so cheap. It would appear to be a very strong buy but one is wary because of the sentiment that is evident in this sector.

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