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You can find the current article at its original source at https://www.theguardian.com/business/nils-pratley-on-finance/2017/jul/10/carillion-contracts-construction
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| Carillion has paid a heavy price for too many risky contracts | Carillion has paid a heavy price for too many risky contracts |
| (35 minutes later) | |
| Never trust a construction contractor. Whatever they say about their prudent approach to risk and the watertight nature of their contracts, it only takes a few mistakes to wreck a balance sheet in an industry that runs on thin profit margins. | Never trust a construction contractor. Whatever they say about their prudent approach to risk and the watertight nature of their contracts, it only takes a few mistakes to wreck a balance sheet in an industry that runs on thin profit margins. |
| Carillion has proved the point in spectacular fashion. Three years ago it presented itself as such a model of conservatism that Balfour Beatty shareholders would be doing themselves a favour by agreeing to an all-share merger and importing some self-discipline. | Carillion has proved the point in spectacular fashion. Three years ago it presented itself as such a model of conservatism that Balfour Beatty shareholders would be doing themselves a favour by agreeing to an all-share merger and importing some self-discipline. |
| The deal never happened and Balfour’s shareholders should give thanks for their escape. Carillion’s share price in those days was 340p. Now it is 117p, down 39% on the day, as the firm was obliged to confess that all those hedge funds who have been shorting the shares had correctly identified the whiff of something rotten. | The deal never happened and Balfour’s shareholders should give thanks for their escape. Carillion’s share price in those days was 340p. Now it is 117p, down 39% on the day, as the firm was obliged to confess that all those hedge funds who have been shorting the shares had correctly identified the whiff of something rotten. |
| Monday’s profits warning was a humdinger. The total provision was £845m, which compares to the company’s much-reduced stock market value of £550m. Even the cash costs of fixing the bad contracts, estimated at £100m to £150m, are equivalent to a year’s profit at the upper end. The source of Carillion’s woes is just four contracts, three in the UK and one in the Middle East, plus the cost of getting out of markets in Canada and the Middle East. | Monday’s profits warning was a humdinger. The total provision was £845m, which compares to the company’s much-reduced stock market value of £550m. Even the cash costs of fixing the bad contracts, estimated at £100m to £150m, are equivalent to a year’s profit at the upper end. The source of Carillion’s woes is just four contracts, three in the UK and one in the Middle East, plus the cost of getting out of markets in Canada and the Middle East. |
| The underlying problem is familiar: too many contracts that are too risky from the contractor’s point of view. Over-optimism, in other words. Chief executive Richard Howson has lost his job, though is staying on outside the boardroom to see what he can do to help recovery. | The underlying problem is familiar: too many contracts that are too risky from the contractor’s point of view. Over-optimism, in other words. Chief executive Richard Howson has lost his job, though is staying on outside the boardroom to see what he can do to help recovery. |
| Stand-in boss Keith Cochrane, well-regarded former chief executive of Weir Group, is a good man to have a crisis but, as the share price plunge suggests, fixing the balance sheet may mean asking shareholders for fresh funds. Borrowings averaged £695m in the first half and Carillion is towing a deficit in its pension funds of £587m at the last count. The analysts’ working assumption is a £500m rights issue. | Stand-in boss Keith Cochrane, well-regarded former chief executive of Weir Group, is a good man to have a crisis but, as the share price plunge suggests, fixing the balance sheet may mean asking shareholders for fresh funds. Borrowings averaged £695m in the first half and Carillion is towing a deficit in its pension funds of £587m at the last count. The analysts’ working assumption is a £500m rights issue. |
| After that, no doubt, there will fresh commitments to rigour, plus a promise to accelerate Carillion’s shift towards the safer territory of support services, meaning maintaining roads and railways. Sometimes it works, at least for a while. Balfour Beatty, for example, seems to be de-risking merrily since the upsets of 2014. But, why, in this industry, does it always seem to take a crisis to make it happen? | After that, no doubt, there will fresh commitments to rigour, plus a promise to accelerate Carillion’s shift towards the safer territory of support services, meaning maintaining roads and railways. Sometimes it works, at least for a while. Balfour Beatty, for example, seems to be de-risking merrily since the upsets of 2014. But, why, in this industry, does it always seem to take a crisis to make it happen? |
| Banks should remember lessons of the last crisis | |
| Ten years on (almost) from the financial crisis, banks are up to some of their old tricks, it seems. | Ten years on (almost) from the financial crisis, banks are up to some of their old tricks, it seems. |
| Sam Woods, a deputy governor of the Bank of England, didn’t express himself so bluntly, but his warning that financial firms are engaged in games of “pure regulatory arbitrage” is serious. The allegation is that some banks and building societies (though he named no names) are obeying the letter of the rulebook but circumventing its spirit. True risks are being disguised. | Sam Woods, a deputy governor of the Bank of England, didn’t express himself so bluntly, but his warning that financial firms are engaged in games of “pure regulatory arbitrage” is serious. The allegation is that some banks and building societies (though he named no names) are obeying the letter of the rulebook but circumventing its spirit. True risks are being disguised. |
| A cynic might say that Bank regulators, having failed to spot the looming disaster in 2007, are bound to veer towards the opposite extreme this time. Such an interpretation might be comforting, but it doesn’t fit the evidence. | A cynic might say that Bank regulators, having failed to spot the looming disaster in 2007, are bound to veer towards the opposite extreme this time. Such an interpretation might be comforting, but it doesn’t fit the evidence. |
| By way of example, Woods suggested some institutions have shifted assets into special purpose vehicles to reduce capital charges. That behaviour looks complex and devious and carries the exact flavour of the bad old days. | By way of example, Woods suggested some institutions have shifted assets into special purpose vehicles to reduce capital charges. That behaviour looks complex and devious and carries the exact flavour of the bad old days. |
| The scale of the trickery is hard to assess from outside but we should be worried that Threadneedle Street is worried. The ringfencing of banks’ retail operations, which was the single most important post-crisis regulatory reform, is still a work in progress. The deadline for implementation is the start of 2019. It’s very early in the day for bank bosses to be forgetting, or ignoring, the lessons of the last crisis. | The scale of the trickery is hard to assess from outside but we should be worried that Threadneedle Street is worried. The ringfencing of banks’ retail operations, which was the single most important post-crisis regulatory reform, is still a work in progress. The deadline for implementation is the start of 2019. It’s very early in the day for bank bosses to be forgetting, or ignoring, the lessons of the last crisis. |
| Santander gives British shareholders the brush-off | Santander gives British shareholders the brush-off |
| Over at Santander, they are already behaving like it’s 2008 in one specific regard. The Spanish bank’s 1.4 million British shareholders won’t be able take part in the €7.1bn (£6.3bn) rights issue, just as they weren’t when a similar sum was raised nine years ago. | Over at Santander, they are already behaving like it’s 2008 in one specific regard. The Spanish bank’s 1.4 million British shareholders won’t be able take part in the €7.1bn (£6.3bn) rights issue, just as they weren’t when a similar sum was raised nine years ago. |
| Involving the Brits, who mostly got the shares via Santander’s past takeovers of Abbey National and Alliance & Leicester, apparently would be too tricky to organise. They mostly hold their Spanish paper via nominee services. There is not enough time to go through those nominees and ask everybody if they wish to take up their entitlement to new shares at a discounted price. | Involving the Brits, who mostly got the shares via Santander’s past takeovers of Abbey National and Alliance & Leicester, apparently would be too tricky to organise. They mostly hold their Spanish paper via nominee services. There is not enough time to go through those nominees and ask everybody if they wish to take up their entitlement to new shares at a discounted price. |
| Santander’s stance is feeble. Yes, it is mitigating the problem by sending the British investors a cheque to cover the value of their rights and offering them a commission-free dealing service if they wish to buy more shares. But the whole idea of a rights issue is that all shareholders are treated equally and get first refusal. If that principle isn’t followed to the letter, it’s not a proper rights issue. | Santander’s stance is feeble. Yes, it is mitigating the problem by sending the British investors a cheque to cover the value of their rights and offering them a commission-free dealing service if they wish to buy more shares. But the whole idea of a rights issue is that all shareholders are treated equally and get first refusal. If that principle isn’t followed to the letter, it’s not a proper rights issue. |
| Santander has had almost a decade to solve the administrative problem but doesn’t seem to have tried. Small shareholders, once again, are being treated as an inconvenience. | Santander has had almost a decade to solve the administrative problem but doesn’t seem to have tried. Small shareholders, once again, are being treated as an inconvenience. |