Carillion collapse hits banks and investors, boosts short sellers

By Emma Rumney, Ben Martin and Alasdair Pal

LONDON (Reuters) - Leading British lenders including Barclays, the Royal Bank of Scotland and Lloyds Banking Group face the prospect of hundreds of millions of pounds in outstanding loans going unpaid from Carillion's collapse on Monday.

Along with 10 other banks, they arranged a 790 million pound ($1.1 billion) revolving credit facility for Carillion in 2015, which made up the bulk of 835 million pounds worth of syndicated bank loans owed by Carillion that mature in 2020.

Last September, five banks agreed to an additional 140 million pounds in loans repayable at the end of 2018.

In total, creditors to the UK support services and construction group, which was forced into liquidation on Monday, have around 1.6 billion pounds of debt exposure to the company.

Many already started booking writedowns last year, as Carillion's woes mounted following a profit warning in July.

Lloyds took a 270 million pound impairment charge at its third quarter results, up from 204 million pounds over the same period a year earlier. A source familiar with the matter said on Monday this was largely due to problems at Carillion.

These were also the main driver for a jump in provisions at Santander UK's global corporate bank, another source said. They rose to 47 million pounds in the nine months to September 2017, up from 21 million pounds a year earlier.

The bank is likely to take a further hit at its annual results in February, the source said. At RBS's commercial bank, provisions in the third quarter also spiked, growing from 20 million pounds in 2016 to 151 million pounds. At the time, Chief Executive Ross McEwan said this was down to a "single name".

The banks declined to comment on their exposure to Carillion.

"I suspect that Lloyds and RBS could take a further writedown in Q4, and in addition to that the other lenders to Carillion are likely to take a writedown as well," said John Cronin, head of UK banks research at analyst firm Goodbody said.

"The question is how material that is."

SHAREHOLDERS SUFFER

Asset managers with stakes in the company have also been among the casualties since Carillion's crisis first became apparent last year.

Scotland's Kiltearn Partners, Canada's Letko Brosseau and Associates and BlackRock - the world's biggest asset manager - held large stakes in Carillion before a July 10 profit warning, which triggered a 39 percent plunge in its shares on the day.

Back then Kiltearn was Carillion's top investor with a 10 percent stake, according disclosures made to the stock market. BlackRock had a 7.6 percent shareholding and Letko owned 6.1 percent. All three have since cut down on their holdings.

A spokesman for Kiltearn said the investment firm did not hold any shares by the time Carillion was placed in liquidation, having already reduced it stake to 4.9 percent by December.

BlackRock's holding went below 5 percent - meaning it no longer had to disclose its stake - just days after the July warning, while Letko's stake had been cut to 2.8 percent by November.

SHORT POSITIONS PAY OFF

Among those who benefited from Carillion's demise, hedge funds shorting its shares have however made paper profits of hundreds of millions of dollars over the last year.

With a quarter of Carillion's shares shorted at the beginning of July 2107 – a total value of around $270 million – short-sellers made around $190 million when its share price fell 70 percent over the course of three trading days following the July profit warning, according to Reuters calculations.

Many of the same funds made an additional $20 million when Carillion again warned on profits in November 2017, sending its shares down a further 48 percent in a single day.

The latest disclosures to Britain's watchdog the Financial Conduct Authority show that BlackRock had a 1.95 percent short position on Carillion stock as of Jan. 11.

A spokesman for BlackRock declined to comment on its overall exposure to Carillion. Letko did not respond to an emailed request for comment.

Hedge funds Bodenholm Capital and Coltrane Asset Management, which both also disclosed bets against Carillion shares to the FCA, made 4 million pounds each from shorting the stock since the July warning, Reuters calculations show.

Short-sellers pay institutional shareholders a fee to borrow their shares, before selling these on into the market. In most cases the hedge fund hopes to buy these shares back at a lower price in the future, return them to the original shareholder and pocket the difference.

But if a company enters liquidation and its shares are eventually deemed worthless, the hedge fund does not have to return the stock.

"They will sit on people's books for a while, the short-sellers will continue to pay a rental fee for a period of time to the original holder, but eventually they will be written off by both sides," said David Lewis, an analyst covering short-selling at data provider Astec Analytics.

"The short-seller gets to keep the money they sold it for."

($1 = 0.7251 pounds)

(additional reporting by Maiya Keidan; Editing by Keith Weir)