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Six warning signs that the Carillion collapse was coming Six warning signs that the Carillion collapse was coming
(35 minutes later)
Alarm bells suggesting the construction giant might be in terminal trouble have been ringing for months Alarm bells over the construction giant’s looming demise were ringing for months
Angela MonaghanAngela Monaghan
Tue 16 Jan 2018 18.04 GMTTue 16 Jan 2018 18.04 GMT
Last modified on Tue 16 Jan 2018 18.07 GMT Last modified on Tue 16 Jan 2018 18.36 GMT
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The collapse of construction giant Carillion, putting thousands of jobs and numerous projects at risk, was shocking, but not entirely surprising. Some hedge fund managers were so sure the company’s problems were mounting they gambled on the share price plunging and made millions. The warning signs they were watching included: The collapse of the construction giant Carillion, which has put thousands of jobs and numerous projects at risk, was shocking, but not entirely surprising. Some hedge fund managers were so sure the company’s problems were mounting they gambled on the share price plunging and made millions. The warning signs they were watching included:
1. Profit warnings1. Profit warnings
Three profit warnings in five months gave the clearest and most public signal that Carillion was in serious trouble. The first came on 10 July when the company shocked the market with a £845m writedown on contract values and the chief executive, Richard Howson, stepped down. A second warning came in September followed by a third in November as its financial woes deepened. The City reached for the alarm bell and Carillion shares plunged from 192p before the first warning to just 14p on Friday, the last day of trading. Three profit warnings in five months gave the clearest and most public signal that Carillion was in serious trouble. The first came on 10 July when the company shocked the market with a £845m writedown on contract values and the chief executive, Richard Howson, stepped down. A second warning came in September, and a third in November as its financial woes deepened. Carillion shares plunged from 192p before the first warning to just 14p on Friday, the last day of trading.
2. Short-selling2. Short-selling
Hedge funds and other financial speculators had been shorting Carillion shares, betting the firm would hit trouble, even before the profit warnings. Short-sellers borrow the shares from other investors in return for a fee. They then sell the shares in the belief they will be able to buy them back cheaper at a future date. If the bet works, they make a profit and then return the shares to the original investor. At one point last summer, 25% of Carillion’s shares were shorted. Among the short-sellers were BlackRock, whose advisers include the former chancellor George Osborne, Italian-run Kairos and SFM UK, a fund linked to the billionaire financier George Soros. Hedge funds and other financial speculators had been shorting Carillion shares, betting the firm would hit trouble, even before the profit warnings. Short-sellers borrow the shares from other investors in return for a fee. They then sell the shares in the belief they will be able to buy them back cheaper in future. If it works, they make a profit and return the shares to the original investor. At one point last summer, 25% of Carillion’s shares were shorted. Among the short-sellers were BlackRock, whose advisers include the former chancellor George Osborne, Italian-run Kairos and SFM UK, a fund linked to the billionaire financier George Soros.
3. Mounting debts and pension deficit3. Mounting debts and pension deficit
Spiralling debts and a huge pension deficit were further signs of the extent of problems at Carillion and ultimately proved its downfall. The company’s debts soared by more than 50% to £900m between September last year and its collapse this week and it had a pension black hole of about £580m – although pensions experts expect the final figure to be higher. Spiralling debts and a huge pension deficit signalled the extent of the problems and ultimately proved Carillion’s downfall. The company’s debts soared by more than 50% to £900m between September and its collapse this week and it had a pension black hole of about £580m – although experts expect the final figure to be higher.
Carillion relies on major contracts, some of which have proved much less lucrative than it thought. Carillion relies on major contracts, some of which have proved much less lucrative than it thought. 
Earlier this year it slashed the value of them by £845m, of which £375m related to major public-private partnerships (PPPs) such as Royal Liverpool University hospital. Earlier this year it slashed the value of them by £845m, of which £375m related to major public-private partnerships (PPPs) such as Royal Liverpool University hospital. 
As its contracts underperformed, its debts soared to £900m. As its contracts underperformed, its debts soared to £900m. 
The company needed a £300m cash injection, but the banks that lent it money refused to put more in. The company needed a £300m cash injection, but the banks that lent it money refused to put more in. 
The government also refused to step in and bail the firm out. The government also refused to step in and bail the firm out. 
That left the company unable to continue trading and forced it to go into liquidation.That left the company unable to continue trading and forced it to go into liquidation.
4. Delaying payments to subcontractors4. Delaying payments to subcontractors
Carillion was taking longer to pay its subcontractors. The Federation of Small Businesses wrote to the company in July after suppliers complained to the trade body that they were being made to wait 120 days to be paid. That is double the 60 days generally accepted to be the maximum according to industry standards. “With hindsight, that was an early sign of trouble,” a spokesman for the FSB said. It is thought about 30,000 small firms are owed money by Carillion. The Federation of Small Businesses wrote to the company in July after suppliers complained to the trade body that they were being made to wait 120 days to be paid, double generally accepted 60-day maximum. It is thought Carillion owes money to about 30,000 small firms.
5. Complex financing arrangements5. Complex financing arrangements
Carillion was turning to ever more unusual methods to secure finance, in a sign that it was struggling to access more traditional sources of debt, from banks and standard bonds. The company had raised £112m through a so-called Schuldschein bond, a market which requires less public disclosure of financial detail. According to reports, it had also turned to “reverse factoring”, where banks – for a fee – would pay Carillion’s suppliers, allowing the company to settle up later. Carillion was using increasingly unusual methods to secure finance – a sign it was struggling to access more traditional sources, from banks and standard bonds. The company had raised £112m through a Schuldschein bond, a market that requires less public disclosure of financial detail. It had also reportedly turned to “reverse factoring” where, for a fee, banks paid Carillion’s suppliers, allowing the company to settle up later.
6. The cracks were visibly showing 6. The cracks were visible
One of Carillion’s most problematic contracts was the construction of the Royal Liverpool University Hospital. The project was delayed after workers found “extensive” asbestos on site and cracks in concrete beams in the new building. Originally slated to open in March last year, the hospital remains unfinished. It was a big drain on the company and one of the central issues identified in the first profit warning. One of Carillion’s most problematic contracts was the construction of the Royal Liverpool university hospital. The project was delayed after workers found “extensive” asbestos on site and cracks in concrete beams. Originally slated to open in March last year, the hospital remains unfinished. It was one of the central issues identified in the first profit warning.
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CarillionCarillion
Construction industryConstruction industry
Public financePublic finance
Private finance initiativePrivate finance initiative
Job lossesJob losses
Corporate governanceCorporate governance
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