Carillion's shares have taken a battering over the last week with around 70 per cent wiped off of the firm’s market capitalisation in the wake of a shock announcement to the stock market last Monday.
The FTSE 250 builder and project manager decided to get all its bad news out at once, revealing details of an £845m provision against a number of contracts, an associated profit warning, cash flow concerns and the exit of its chief executive.
Some of Carillion’s afflictions were not seen as new; many had been signposted at its AGM in May. But last week management admitted for the first time they were not going to be able to sort things out without making some painful financial decisions.
Here are the key financial headaches Carillion is facing.
1 – Can it deliver a rights issue?
As Carillion’s share price collapsed around 40 per cent a week ago, the assumption by City analysts was that the firm would be going cap in hand to shareholders.
The problem, as Liberum analyst Joe Brent summed up, was:
Given the weaker profits, higher debt, need for restructuring, limited proceeds from disposals and working capital unwind in construction, we believe that Carillion will need to raise a significant amount of more money.
The amount it wants to raise is expected to be in the order of £500m, which is tricky sell with the firm's equity currently worth just £242m. This tough ask which will only get harder if the share price falls further.
Read more: Hedgies bag £80m on Carillion crash
2 – What is the problem with its bank debt?
The level of bank debt is a big concern for the market. Average net borrowing has jumped from £586.5m during 2016 to £695.0m in the first half of 2017.
Carillion said it is operating “well within” its banking covenants. But a large slug of its debt facilities are due to be repaid in 2020. This isn’t very far away for lenders, which will want to know how they are going to be repaid.
Whether or not the banks, led by Royal Bank of Scotland subsidiary Natwest, will be repaid will depend on the success of the rights issue. At least part of the capital raise will likely be used to pay them back.
3 – What will happen to its pension?
Carillion is not alone in having a sizable pension deficit. The only sliver of hope is its shortfall fell from £663.2m to £587.0m in the first six months of the year. But this is still approaching three times the firm’s current market cap.
“It is a big deficit for the size of the company,” said independent pensions expert John Ralfe.
It’s not going to end happily.
This is not least because in the event of an insolvency, the pension scheme sits behind the bank debt in terms of priority of payment. In a doomsday scenario, the pension scheme could fall into the Pension Protection Fund, leading to pension pay outs being capped and cut.
Ralfe said if this happened the scheme could be in the top five largest deficits to be shouldered by the PPF, and dwarf high profile failures such as BHS.
4 – Can it access insurance to function?
It is traditional for construction firms to provide sureties to protect their customers from being left high and dry in the event of a financial failure. Access to such “bonding” is critical to being able to bid for contracts.
The sureties already in place will likely have limited recourse to Carillion because they will be issued by special purpose vehicles rather that the group itself according to independent construction M&A analyst Greg Malpass.
However, putting new bonding in place requires insurers to review the credit quality of the underlying firm. The tap to such sureties may well have been turned off, curbing its ability to bid for new work.
The future ability to secure bonding for projects and achieve growth will be impaired while it sells off businesses and reorganises.