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Third profit warning and expected breach of covenants for Carillion

Outsourcing and construction firm, Carillion saw the company’s share prices take a massive tumble on Friday (17 November) following the issue of a third profit warning and the likelihood it is to breach its financial covenants at the end of this year.

Since July, when Carillion issued its first profit warning the Group has been focused on reducing costs, collecting cash, executing its disposals programme and implementing its new operating model however, the Group has confirmed whilst these “self-help measures” will serve to reduce the Group’s average net debt over time, they “will not be sufficient” to enable the business to achieve its target net debt to EBITDA ratio of between 1.0 to 1.5 times by the end of 2018.

In its interim results on 29 September 2017, Carillion confirmed that it was forecast to be in compliance with its financial covenants as at 31 December 2017.  As then indicated, compliance with its financial covenants was dependent on achieving its underlying forecasts, which assume that the normal pattern of receipts and payments continue alongside the completion of a number of PPP disposals and settlement receipts on contracts. 

The Group now 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 31 December 2017 “being materially lower than current market expectations”.  Due to the impact of delays in receipts and disposals, the Group is now expecting full year average net borrowing in 2017 to be between £875 million and £925 million.

The Board is now in discussions with stakeholders regarding a broad range of options to further reduce net debt and repair and strengthen the Group’s balance sheet, which the Group says “will require some form of recapitalisation”, and could lead to a “restructuring” of the balance sheet. The Board expects to commence steps to implement the chosen option during the first quarter of 2018.

Interim Chief Executive, Keith Cochrane commented: “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 2 April 2018.”

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