Blue Monday – the third Monday in January, so called because it is apparently the most depressing day of the year – was a particularly grim day for Carillion.
After days of tense talks with the Government and its lenders, the firm announced just before the stock market opened for the week that it had been put into liquidation.
Across the country, thousands of construction workers, hospital cleaners and dinner ladies turned up for work not knowing whether they would be paid or not. Scores of small companies, employed via Carillion as subcontractors on projects, were left with bills unpaid, wondering whether they would ever see the money owed to them. Stories emerged of workers scrambling to retrieve their tools from building sites, concerned that valuable equipment would be seized as part of the liquidator’s hunt for sellable assets.
In the construction sector, telephones began ringing with offers of new jobs – the sector is short of workers and many rival firms saw the opportunity to snap up Carillion’s best employees for their own teams. But on the whole, uncertainty reigned. It was unclear what would happen to Carillion’s vast number of contracts in both the public and private sector. Would building work stop and offices remain uncleaned? In the immediate hours following the announcement, the Government could only guarantee jobs for 48 hours. That gave workers until Wednesday to find ways of paying their bills.
It may take months before a full picture emerges of exactly what went wrong – a parliamentary investigation and a probe by the Financial Conduct Authority are still to come – but there are already many lining up to say that they knew it was in trouble all along.
Its problems have forced the Government to ask difficult questions about the way public services are delivered. Carillion is one of a string of outsourcing embarrassments for ministers: who can forget the Army having to step in when G4S failed to provide enough security for the London Olympics in 2012, or Serco overcharging to tag criminals? Nearly all the big major providers of public services, Capita, Interserve and Mitie, have issued profit warnings in the past two years. So what was it that sent Carillion over the edge? Time and again those close to the situation cited the same problem: cash. Carillion ended its life with just £29m in the bank – a tiny figure given its £1.3bn debt pile and the £146.7m of pre-tax profits it reported it made in 2016.
Cash flow seemed to have been a major bugbear for suppliers. Many complained of being paid late, or that Carillion had extended its payment time to an unfair length. Peter Rogers, joint founder of Lipton Rogers, which is building 22 Bishopsgate, the City’s tallest tower, says: “I wouldn’t do business with them. As Tarmac [the group that demerged in 1999, forming Carillion] they were good but they then started extending their payment terms up to 120 days. This has been going on for a long time.” Despite Carillion’s problems extending back a number of years, its peers say they had no reason to doubt that it was performing well.
A subcontractor who did not wish to be named says that it had not been evident that “the ship was falling apart” when he worked with the firm in recent months. “However, the talk in the industry was always that it was fraught with difficulty to get payment out of them and they were known for having long payment terms,” he adds.
The company was particularly hesitant to pay out towards the end of the year, some say, which could suggest that it was trying to maximise its cash position to show investors and shareholders that it was doing well when it published its annual figures.
“They were perceived as a very poor payer – they maximised how long they could get away with,” one client explains. “They were known to push out payment terms to subcontractors; they always held out on cash, particularly at the end of the year.”
The delaying tactics triggered a red light for hedge funds in the City and as far flung as Wall Street. Lengthening payment terms were “effectively a debt” that had not been universally spotted by investors and when the issue was flagged it “wasn’t properly understood by the market”, says one hedge fund insider. As an old investor adage goes, bad numbers take longer to add up. “This off-balance sheet debt was growing all the time. If you dug around a bit, you could see references to it but not in full detail and the hedge funds had spotted it,” they explained.
Although some short-sellers first started ramping up their bets against the outsourcer as far back as 2013, an ill-fated attempt to merge with Balfour Beatty in 2014 reportedly first tipped off the majority. By the time of last July’s colossal profit warning, over 25pc of Carillion’s shares were on loan to short-sellers, making it the most shorted stock in London.
Hedge funds collectively trousered a cool £80m from the first share price plunge last July as Carillion’s value nosedived 70pc in just three days. Sensing that the profit warning was the first pulled thread that would unravel the firm’s financial woes, the majority of hedge funds sat tight right until its collapse. With 15pc of its shares remaining on loan to hedge funds last week, they pocketed an extra £9m after talks failed.
What they might also have noticed, analysts suggest, is the widening gap between Carillion’s profits and actual cash pile. The two should shadow each other – as profits grows, so does cash – but increasing profits were not matched by the firm’s less healthy cash balance and ballooning debt.
Any cash Carillion had was spent on expensive acquisitions, leaving it exposed when contracts turned out to be more expensive than anticipated.
Then there was the practice of reverse factoring. Put simply, companies owed money by Carillion could approach its lenders to get paid, for a fee, letting Carillion settle its bills without having to hand over any cash.
But the company’s reliance on this resulted in it racking up debts of at least £350m with lenders who paid its bills. Another red flag was a debt refinancing deal that Carillion agreed a year ago. It raised £112m through the Schuldschein Market, money generated privately through German lenders. The deal indicated that Carillion was unable to use normal financing routes from mainstream banks. Two other firms that have used the Schuldschein system are Cobham, which has since issued a string of profit warnings, and Steinhoff, currently embroiled in a major accounting scandal.
Carillion’s seemingly desperate search for cash seems particularly stark when viewed alongside its directors’ handsome salaries, but they will face the heat soon enough: Greg Clark, Business Secretary, said last week that he wanted an Insolvency Service investigation to be fast-tracked and expanded in its scope.
The FCA had already announced earlier this month that it would be investigating the “timeliness and content” of some of its stock market announcements in the run up to last year’s first shock profit warning. One prominent shareholder who did not want to be named says that the updates released to the market by management were “misleading at best”, adding that there would “probably be a reasonable basis” to bring a case against individuals, arguing that “what was stated or the behaviour, whether it was by act or omission, was fraudulent”.
“The figures in the RNS [update to the market] were a surprise when they came out last July,” they explain.
Keith Cochrane, who was parachuted in as the interim chief executive in July, hinted at wider problems when he said a “change of culture” was necessary to turn the business around. “The lowest bid isn’t always the best value,” one chief of a rival firm told The Sunday Telegraph. “Carillion were known for bidding low but then asking for more money further down the line.”
Richard Steer, chairman of construction consultant Gleeds, calls the situation “a tragedy on many levels”. Carillion’s collapse came down to three to four major building projects all losing money all at once: the Aberdeen bypass; and two hospital projects in Liverpool and Birmingham. Work in the Middle East was also damaging: of £845m of write downs last year, £314m came in the region.
Politicians will need to ask difficult questions about why Carillion was handed these projects in the first place. And whether relying on profitmaking businesses to deliver vital public services is the best way of serving the British public’s needs.