Shares in construction group Carillion have fallen sharply following a warning from the Board that the company is likely to breach its loan covenant at the end of December.
A statement issued by the Board on Friday said Carillion is currently in discussion with its financial stakeholders and intends to defer the testing of its financial covenants.
Since July, The Board said Carillion has been focused on reducing costs, collecting cash, executing its disposals programme and implementing its new operating model. However, it is warning that while the “self-help measures” will serve to reduce the Group's average net debt over time, they will not be enough to enable it to achieve its targets by the end of 2018. The discussions with stakeholders are centred round a broad range of options to further reduce net debt and repair and strengthen the Group's balance sheet.
The statement says:
“This will require some form of recapitalisation, which could involve a restructuring of the balance sheet. The Board expects to commence steps to implement the chosen option during the first quarter of 2018 and a further announcement will be made in due course.”
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 but that this was dependent on achieving its underlying forecasts.
The Group now expects profits for the year to 31 December 2017 to be materially lower than current market expectations with full year average net borrowing in 2017 to be between £875m and £925m.
The problem is attributed to 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.
Following discussions with its principal lenders and with their support, the Board said it has concluded that it is necessary to defer the test date for both its financial covenants from 31 December 2017 to 30 April 2018.
Commenting, Interim Chief Executive, Keith Cochrane said:
"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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