Carillion plc today provides an update on discussions with its financial stakeholders, trading and its intention to seek to defer the testing of its financial covenants.
Since July, the Group has been focused on reducing costs, collecting cash, executing its disposals programme and implementing its new operating model. These self-help measures will serve to reduce the Group’s average net debt over time, but they will not be sufficient to enable the Group to achieve its target net debt to EBITDA ratio of between 1.0 to 1.5 times by the end of 2018. The Board is therefore in discussions with stakeholders regarding a broad range of options to further reduce net debt and repair and strengthen the Group’s balance sheet. 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. 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 Board has kept under continuous review the risk that receipts from contract claims and/or disposals forecast to be received during November and December 2017 might slip beyond 31 December 2017. 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. Given the impact of delays in receipts and disposals, the Group now expects full year average net borrowing in 2017 to be between £875m and £925m.
Based on its latest forecasts, reflecting the items mentioned above, the Board now expects a covenant breach as at 31 December 2017. Following discussions with its principal lenders and with their support, the Board has concluded that it is necessary to amend the relevant agreements to defer the test date for both its financial covenants from 31 December 2017 to 30 April 2018 (based on EBITDA for the 12 months to that date), by which time it expects to be implementing its recapitalisation plan. Carillion has now commenced a process to seek the consents necessary to make this amendment.
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. Constructive dialogue is continuing with our financial stakeholders to rebuild the Group’s balance sheet, 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.”