carillion - moore and smalley

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Article written by Richard Miller, Director & Head of TradeRisk Solutions

The demise of Carillion will not come as a surprise to many people. Over

the years the UK construction industry has seen its fair share of troubles.

Some have survived to fight another day but many have not, taking sub-

contractors and other business with them when they fail.

Carillion were the second largest construction company in the UK but had crippling debt burdens

which are widely reported to be of around £1.5 billion. A well-known name in the UK, people will

recognise them as not only a construction company working on the likes of the Battersea Power

Station redevelopment but they were also engaged in facilities management and maintenance as

well as being a huge service provider to the public sector.

Carillion employed 43,000 people globally with half of those being in the UK. It expanded rapidly

with operations across the world, most notably in the Middle East & Canada.

Background

If we go back to 2016 their turnover was around £5.2 billion and until the middle of last year had a

market capitalisation position of £1 billion. Since then the share price has fallen drastically which

resulted in the company being worth circa £61 million towards the end of 2017. During 2017

they issued three profit warnings over five months and wrote off over £1 billion on their

contracts. This made it very difficult for them to manage and service their debts with

various banks. Late in 2017 they asked their banks for help and to give them more time

to either service the debt or refinance their position.

It would be easy to point the finger at the banks and blame them for Carillion’s fall from

grace. However, the banks did agree a fresh round of funding, but with conditions.

Additionally, there were other factors involved. Selling parts of the business were not

realised and whilst the Government continued to award contracts to them with the hope

that such large, prestigious contracts would give the funders confidence in the business,

it could be argued that Carillion were over stretching themselves.

Carillion

The Demise &Domino Effect



They took on contracts that proved unprofitable and faced payment delays on their Middle East contracts. Costs overran on many projects, most notably the Midland Metropolitan Hospital, Royal Liverpool Hospital and the Aberdeen by-pass.

During Q4 2017 Carillion had been in discussion with the Government to avoid the collapse of the business. When they went bust on Monday, 15th January 2018, it was widely reported that they were left with just £29 million in cash.

This is a spectacular fall in fortunes when you analyse the company’s share price in January 2017 of circa 240p. Following the profit warning statement in July 2017, almost 200p was wiped off the share price and they never really recovered.

It rallied slightly on the announcement that the Government had awarded them the £1.4 billion HS2 contract. However, the share price continued to gradually fall. Even after the award of the £130 million London – Corby rail contract in November, this made no difference to the share price.

What happened next?

Eventually Carillion ran out of cash. Talks with the Government to bail them out with funding failed. The banks were not prepared to offer short term funding and tax payments were not allowed to be deferred. Carillion declared itself bankrupt on 15th January 2018. The Official Receiver liquidated the business rather than putting the company into administration which may have recovered something from Carillion.

So where did this leave companies and sub-contractors who worked for Carillion?

It has been estimated that some 30,000 firms had been working across various projects in the UK. A great many of these are undoubtedly owed money for work they have undertaken. Whilst the Government announced on Monday 15th January 2018 some limited payment support, this does not offer a complete solution.

Many suppliers have been utilising Carillion’s Early Payment Facility which has been in operation since 2013. Suppliers could get paid earlier than Carillion’s standard 120-day payment terms, once invoices were approved. Whilst this system processed more than £400 million of invoices, this facility stopped once Carillion went into insolvency. However, in recent months sub-contractors had reported delays in getting invoices signed off and being offered lower amounts than the invoiced figure.

In a recent article in the Financial Times, Suzannah Nicol, Chief Executive of Build UK said she estimated that Carillion owed money to between 25,000 and 30,000 businesses, some of which were owed the equivalent of 10% of their turnover. It is inevitable that these companies will owe money to their suppliers and by not being paid by Carillion, will cause them to delay payments down the chain.

Therefore, we can see how this domino effect will have wide reaching ramifications across the supply chain.

In the same article, Suzannah Nicol went on to say that in previous cases of large contractor failures, you see around 17-18% of businesses who are creditors not making it through the next five years.



Trade Credit Insurance

The Trade Credit Insurance market widely understood the problems that Carillion were

facing. Many insurers had taken steps at the very least to limit and monitor exposure.

Euler Hermes for example in early January 2017 advised that they were not

underwriting any new coverage on Carillion. Other insurers, including Tokio Marine HCC

and Nexus announced to clients that they would not insure new deliveries to the

contractor.

Whilst credit insurers are bracing themselves for losses and claims payments, it is too

early to ascertain what the final figure could be here, the recent demise of Palmer &

Harvey is rumoured to be around £100m for UK insurers. Carillion had been a

problematical case for some time and, arguably, had it not been for the award of public

sector projects, failure could have taken place some months ago.

Trade Credit Insurance protects you from losses where you have not been paid due to

the insolvency of the customer (this includes administration, bankruptcy, winding up

petitions, voluntary arrangements or similar), or protracted default – the simple failure to

pay an undisputed debt for a specified period.

Whilst credit insurance will not turn a bad risk into a good risk, it will prevent a good risk

becoming bad. Insurers can steer you away from bad risks in the first place and are

often the first to become aware of companies in financial difficulties. Such information

may assist in reducing exposure or at least ensuring it is not increased at the wrong

moment.

The domino effect of Carillion’s demise may affect tens of thousands of smaller

companies. Many of these will not be directly working for Carillion, but would have been

working for a sub-contractor of them.

These smaller businesses may struggle to ascertain the credit worthiness of the

companies they deal with. The buyer information provided by credit insurers is

invaluable to these companies. Credit Insurers can gain up-to-date information that is

not in the public domain. Accordingly, they are often significantly better informed than

status agencies, who of course are not taking any risk.

No doubt credit insurers are already analysing which companies within the UK

construction sector will be effected by Carillion and their exposure to them.

Demand for cover is likely to increase but with already limited capacity in the

construction sector, insurers will become more selective and capacity will soon dry up.

The expectation is that once the dust settles on the Carillion situation and losses are

quantified by the credit insurance industry, premium rates are likely to rise during 2018.

Combine this with the losses to the market on Palmer & Harvey, along with the demise

and the financial health warnings attributed to the British outsourcing industry and the

UK High Street for example, now is the time to be talking to the TradeRisk Solutions

team at PIB Insurance Brokers to see how we can assist your business.



TradeRisk Solutions – what do we do?

We structure credit insurance programs designed with clients to complement their

working practices - not impede their business.

As a specialist Lloyds broker, we have access to various markets and partners globally

to advise our clients of the most suitable options available.

We work with SME’s through to global corporates to provide solutions to the risks they

all face in today’s trading environment.

Why use the PIB TradeRisk Solutions team?

› Client centric focus and approach

› Expertise in bespoke solutions

› Independent

› Passion to understand your business

The insurance we arrange can improve cashflow, strengthen a balance sheet, secure

receivables & assets as well as enhance credit management and financial options.

Examples of our Product suite

Domestic & Export Credit Insurance for the non-payment of business trade debts and

receivables on a whole portfolio of buyers, excess of loss basis or for a single buyer.

Top up cover above a primary policy can also be arranged.

Pre-Payment & Non-Delivery Insurance allows a client to secure their supply chain

where they have needed to make an advanced or pre-payment for materials or goods.

Surety Bonds can be arranged for various requirements including performance,

deferred consideration, HMRC, customs & excise and environmental.

Figures quoted in this article obtained from BBC News, Financial Times, Insurance Insider.

For further information please contact a member of our team at

[email protected]

Richard Miller Iain Gunn

t: +44 (0)20 7868 2544 t: +44 (0)20 8382 3924

m: +44 (0)7534 762942 m: +44 (0)7930 994005

e: [email protected] e: [email protected]

Nicola Salmon

t: +44 (0)20 7868 2078

m: +44 (0) 07983 700 485

e: [email protected]

carillion - moore and smalley

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