Carillion enters liquidation

March 2018 | DEALFRONT | BANKRUPTCY & CORPORATE RESTRUCTURING

Financier Worldwide Magazine

March 2018 Issue

With debts of around £1.5bn – including a £600m pension deficit – UK multinational construction giant Carillion Plc entered liquidation in January, sparking a crisis in the nation’s construction industry and highlighting deficiencies in both the awarding of government contracts and the UK’s perceived overreliance on the private finance initiative (PFI).

The decision to liquidate Carillion was taken after PwC and EY concluded that the company was unable to enter insolvency due to insufficient funds. PwC will be providing six ‘special managers’ to advise David Chapman, a civil servant working for the Insolvency Service, who has been appointed as the company’s liquidator. The company’s shareholders will receive nothing as a result of the collapse.

Carillion ran into financial difficulties last year after issuing three profit warnings in five months and writing down more than £1bn on the dwindling value of contracts in the UK, the Middle East and Canada. Yet, despite these warnings, the company continued to receive lucrative contracts from the government.

The company, which employs around 43,000 people worldwide, including 20,000 in the UK, and has a vast global supply chain, was a major public sector partner of the government. The company was responsible for hundreds of public sector projects in the UK and provided a number of key public services, including managing military bases for the Ministry of Defence and providing facilities management for hospitals, courts and schools. The company was also a key partner in a number of nationally important infrastructure projects, such as the new HS2 railway line.

In total, Carillion held 450 UK government contracts when it collapsed. The company’s government contracts represented 38 percent of Carillion’s £5.2bn annual revenue reported in the company’s last accounts, according to the Office for National Statistics (ONS).

Following the company’s bankruptcy, a number of Carillion’s public sector contracts were being covered by the government, at a cost of around £5.4m a day. The government has also been required to provide 48 hours of special funding extended to tens of thousands of Carillion’s sub-contractors working on private sector projects.

A number of factors have contributed to Carillion’s collapse; primarily, however, critics have suggested that the company’s rapid expansion plans in recent years were too ambitious. Furthermore, the company was overreliant on debt. According to Bloomberg data, net debt to equity doubled between 2012 and 2016. While Carillion did attempt to cut costs and dividends, its efforts were too late, only beginning in 2017.

When the scale of its financial difficulties became apparent, the company had hoped to receive a bailout from the government in the region of £20m, a sum which it hoped would encourage banks to follow suit. However, the government was unwilling to intervene.

It addition to the knock-on effect on its supply chain, Carillion’s demise has had a number of other impacts. The Association of British Insurers says it will have to pay out more than £30m to businesses owed money by the company. Small businesses are owed £141,000 on average by Carillion, according to a survey of building, engineering and electrical firms by industry bodies. Medium-sized enterprises – those with 50 to 250 employees – are owed typically £236,000. Larger firms are owed, on average, more than £15m.

Following the collapse of Carillion, there have been calls in the UK to do away with the PFI model. A report from the National Audit Office suggests that PFI contracts will cost the UK tax-payer billions of pounds in the coming decades. It found that under PFI a group of schools cost 40 percent more to build and a hospital 70 percent more to construct than if they were financed by government borrowing.

Despite the PFI backlash, it is unlikely that anything will change, particularly given the size of the industry in the UK. However, writing in the Observer newspaper, prime minister Theresa May pledged that her government will seek to implement new rules to deal with executives “who try to line their own pockets by putting their workers’ pensions at risk”. Ms May also attacked a corporate culture that saw “big bonuses for recklessly putting short-term profit ahead of long-term success”.

Richard Summerfield