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Carillion faces survival battle after debt shock

HS2 contractor Carillion's shares hit by profit alert: AP
HS2 contractor Carillion's shares hit by profit alert: AP

Crsis-hit Carillion took another major blow in its battle for survival on Friday as it admitted it will bust its banking covenants this year after soaring debts and collapsing profits.

The builder, which has worked on London landmarks such as the Tate Modern and Battersea Power Station, saw its shares tumble as much as 60% as rescue efforts hit a major stumbling block.

Carillion has been buffeted since July after a shock profit warning triggered by £845 million in writedowns on poorly performing contracts. In September it crashed to a staggering £1.2 billion loss.

But it poured on yet more pain for long-suffering shareholders today after slow progress on sales of its public-private partnership assets — investments in schools, hospitals and defence projects.

This comes on top of faltering efforts to improve performance on its support services contracts.

Those factors, plus delays to a major contract in the Middle East, mean Carillion’s profits would be “materially” below market hopes this year.

Average borrowing will be up to £925 million in 2017, with underlying profits far below the City’s £225 million consensus.

That puts Carillion comfortably in breach of its covenants, which limit its debts to 3.5 times its profits. The board wants to delay a covenant test from December to April 30.

Carillion, which gained an extra £140 million in facilities from its banks last month, is also wrestling with a £600 million pension deficit.

The shares hit an all-time low of 16.5p at one stage, more than 90% below their level in July, before recovering slightly to 12.8p, or 31%, down at 28.7p. Carillion admitted its finances will “need some form of recapitalisation”, while interim boss Keith Cochrane (pictured) added: “It is clear that significant challenges remain and more needs to be done to reduce net debt and rebuild the balance sheet.” Talks with lenders have been “constructive” he added, but a final decision on rescue options will not be taken until early next year.

Jefferies analyst Sam Cullen said the board should have been “more decisive” early on. “In July most people thought they needed £500 million, but that has gone up by £100 million-£150 million.”

Other experts said Carillion would end up in the hands of its banks.

One analyst said: “They will have to try a debt-for-equity swap because there is no demand for its equity in the market. The chances of another trade buyer look minimal unless somebody is feeling very brave.”