Carillion PLC (LON:CLLN) said it will breach its banking covenants as the troubled construction and services contractor downgraded profits again and warned of a mounting debt pile.
Profits will be “materially lower” than market estimates for the year to 31 December 2017 due to the failure to improve profit margins across UK support service contracts, delays to the disposal of certain public private partnerships and to the start of a significant project in the Middle East.
Third profit warning of the year
The news marks the third profit warning from the company this year as it struggles with badly-performing contracts.
Full year average net debt is expected to rise to between £875mln and £925mln.
Shares plunged 59.04% to 17p in early trading before clawing back some gains to 27.25p.
The company said it no longer expects to be in compliance with its banking terms, as advised in September, and that it would be in breach of its earnings-to-net-debt target ratio.
"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," said interim chief executive Keith Cochrane.
READ: Carillion unveils £13.8mln disposal of holdings in property development companies
“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."
Government intervention possible
The government responded to the announcement by saying that Carillion is a "major supplier to the government with a number of long-term contracts" and that it would await further updates from the company. The announcement sparked speculation of possible government intervention.
"Some investors might think this is the end, but Carillion is too big to fail. Government intervention is possible but this is a nightmare for ministers at such a sensitive moment for the economy," said Neil Wilson, senior market analyst at ETX Capital.
-57% Carillion is getting utterly destroyed
— Neil Wilson (@neilwilson_etx) 17 November 2017
Carillion horror show continues
“The Carillion horror show continues," said Nicholas Hyett, equity analyst at Hargreaves Lansdown.
"Some sort of recapitalisation was inevitable, but a possible debt for equity swap, with debt even higher than the group had anticipated, is probably as bad as anyone would have guessed.
The group has made some progress on asset sales, and it sounds like some cost savings are being made.
"It’s not what the group expected though, and it’s clearly not enough. It’s also probably irrelevant given the state of the balance sheet, with net debt already many multiples of the group’s market capitalisation.”
Analysts at Liberum reiterated a 'sell' rating and target price of 5p, saying Carillion's latest statement confirms its view that there is limited value in the equity.
It noted that the financial liabilities are more than £500mln higher than the enterprise value and continues to expect a debt for equity swap.
UBS also believes one of the most likely routes towards a recapitalisation is a debt for equity swap.
Leaving its rating at 'sell' and target price at 1p, UBS said: "Given the current level of debt (H2 implied now c£1.1bn plus pension and reverse factoring), if fresh external equity can be raised, it may be highly dilutive for existing shareholders."
It added: "We do not think potential asset disposals would materially change the picture, unless businesses can be sold materially above the implied leverage ratio which on our calculations is now approaching 10x "all in" net debt/ EBITDA. Our valuation was already in slight negative equity value today and with higher debt and lower earnings this would widen."
A series of profit warnings
In September, Carillion said it expects full year results to be lower than market forecasts as it reported an eye-watering first-half loss after booking an additional provision of £200mln for support services contracts on top of the previously announced £845mln charge for construction contracts.
READ: Carillion warns on full-year results, as it posts massive first-half loss after booking further contract provisions
A month later, the group revealed that it had signed a head-of-terms agreement to sell a large part of its UK healthcare business to outsourcing company Serco Group PLC (LON:SRP) for £50.1mln.
The firm – which announced plans to exit its UK Healthcare business in September - intends to dispose of the remaining contracts in its UK healthcare facilities management portfolio during 2018.
Carillion in July launched a strategic review to turnaround the business as former chief executive Richard Howson stepped down and the company announced the suspension of its dividend and warned that full year revenue would be lower than expected. Since starting the review, the company has also lost its finance chief Zafar Khan.