Embattled construction group Carillion is set to present a business plan to creditors tomorrow in a bid to restore its balance sheet and avoid collapse.
Shares rose by almost 20% on Monday after news of the meeting between Carillion and banks, including Barclays, HSBC and Santander, broke, but dropped back to 22p by the afternoon. In a statement released this morning the firm said it “is not aware of any material developments that support this share price increase.” The group, which has £900M of debt, will try to come to a financial agreement with lenders to stay afloat.
Hargreaves Lansdown senior analyst Laith Khalaf said: “One of the possibilities that’s been mooted is that there is a debt for equity swap, that is people that have loaned money to the company give up that date in exchange for a share of profits…given what the equity is worth now isn’t that appealing… but if you are a creditor in this company you are already tied to its fortunes to a certain extent and what Carillion needs to do it find a way to convince its debt holders that it is worth it as an ongoing consideration.
“It needs cash basically, it depends whether anyone is willing to stump up, and if no one is the company could ultimately be broken up and assets sold off to meet the outstanding claims, whether that would be enough to meet outstanding claims, who knows.”
Carillion employs around 48,000 people internationally and is a major supplier to the UK Government, which has led to speculation that the Government may step in to rescue the construction firm.
Khalaf added: “I don’t think that there would be a great deal of appetite for that. Carillion does employ a huge number of people and it does have a lot of government contracts. I think politically there wouldn’t be a great deal of desire to step in and take over another private company, largely because if you look at what happened in the banking sector. Going into another industry and saying ‘we got too big to fail over here’ is not particularly politically palatable I suspect.”
CMC Markets analyst David Madden told The Telegraph that Carillion will be hoping for some “breathing space” but is in “dire need of short-term cash, and its lenders aren’t too keen to lend anymore funds”.
The latest analysis from JP Morgan, published last month, said: “The situation at Carillion has deteriorated rapidly since the initial profit warning in July 2017. The likely path to salvation has evolved from disposals, to rights issue to debt restructuring. The group currently intends to implement its recovery plan during the first quarter of 2018, which in our view will likely involve a debt restructuring.”
The urgent meeting on Wednesday comes a week after the Financial Conduct Authority announced it is investigating the firm over the “timeliness and content” of announcements made last year.
In July the firm suffered a £845M writedown, which saw 70% wiped off its share value and chief executive Richard Howson step down. The Wolverhampton-headquartered group issued another profit warning in November that saw shares drop more than 50% to 15p.
In December the troubled construction giant, which has won work on HS2, confirmed deferral of the test date for both its financial covenants from 31 December last year to 30 April this year.
A Carillion spokesman said: “As previously indicated, Carillion is in constructive discussions with a broad range of stakeholders regarding its options to reduce net debt and recapitalise and/or restructure the Group’s balance sheet.
“The Group is currently finalising its business plan, which it intends to present to its financial creditors and certain other stakeholders on Wednesday 10 January 2018, in line with the previously announced timetable. Once finalised, the business plan will provide the basis for the agreement of a proposal to restore Carillion’s balance sheet.”