Carillion crisis: Most private customers to keep paying staff; director bonuses stopped - as it happened

Graeme Wearden (until 2pm) and Nick Fletcher

from on 2018-01-17 18:22 (#3DGFA)

Official Receiver says vast majority of companies who used Carillion's services want to keep paying 'in the interim'

6.22pm GMT

Another day of developments following Carillion's shock collapse on Monday.

Good news for many of the company's employees. The Insolvency Service said that 90% of the companies who employed Carillion have decided that they want those services to continue, and pledged to keep paying for them. An estimated 8,500 people of Carillion's UK workforce were employed on private sector work and faced the risk of being laid off, since the government is not guaranteeing to pay their wages.

6.15pm GMT

Speaking of companies picking up Carillion's contracts, analysts at Jefferies have been taking a look at the possible candidates. Here is their note:

MITIE 5% probability-weighted revenue upside. In our view, MITIE has the widest array of opportunities as it offers similar services to Carillion and has a considerably lower market share in public sector than private. Facilities management contracts at Heathrow Airport (where MITIE has provided services since 2010), Centrica (MITIE's new CEO is ex-Centrica), Mapeley HMRC, Nationwide and Prisons FM all offer upside. Although balance sheet uncertainty and the FCA investigation into the timing of the September profit warning under previous management could count against it, the recent 525m Home Office immigration detainees escort contract suggests otherwise.

Serco 3% probability-weighted revenue upside, but 7-8% EPS impact due to current low margins. In December 2017, Serco signed a Business Purchase Agreement to acquire a portfolio of selected UK health facilities management contracts from Carillion for 47.7m. Carillion is now in breach of the BPA so Serco could walk away, renegotiate, or deal directly with the individual special purpose vehicle operating contract holders. In our view, management remains committed to completing the transaction, may accelerate transition from the original schedule, and seek dialogue with Carillion's remaining healthcare contracts (up to 60m additional revenue). Elsewhere, Prisons FM, Hestia and Allenby/Connaught may also offer upside.

5.51pm GMT

There are several companies which could replace Carillion on public contracts, says Fitch Ratings, but any additional costs will depend on the individual project. The ratings agency - which did not rate Carillion and says the engineering and construction sector is generally sub-investment grade - said:

The implications of Carillion's collapse for the UK PFI/PPP sector will vary between projects. There are several companies that could replace Carillion on individual projects, but replacement costs on construction projects will depend on how advanced construction is, and on how much money, if any, is owed to sub-contractors.

Similarly, the availability of suitably qualified replacement operators and the project's ability to absorb the potential for increased costs and delays if the operator is replaced, is an important consideration in our project ratings analysis. Fitch does not rate any PFI/PPP project that has Carillion as a contractor or service provider. The fact that the company has gone into liquidation suggests there is no value in some of its existing contracts and that they were under-priced. This implies that replacement costs will have to compensate the new contractor/operator for that under-pricing.

5.24pm GMT

Interesting sub-detail of the Carillion saga, hedge funds going short is being seen as a "warning signal" as opposed to "locusts" etc, even by Jeremy Corbyn at PMQs. They are just protecting investors.

4.29pm GMT

Education select committee chairman Robert Halfon wants to know what impact Carillion's collapse will have on schools and the 1,400 apprenticeships run by the company. He has written to education secretary Damian Hinds, saying:

Given the scale and nature of the services provided by Carillion to almost 900 schools and colleges, it is essential that the impacts of the firm's collapse are understood and steps taken to ensure the continuity of services such as school catering and facilities management across the country.

Our Chair @halfon4harlowmp has written to @DamianHinds @DLidington on @educationgovuk response to #Carillion. pic.twitter.com/V36T71e6PM

3.51pm GMT

First he loses his bonus and now he loses another job.

Former Carillion chief executive Richard Howson has just resigned as a non-executive director at oilfield services company John Wood Group.

3.40pm GMT

The government has welcomed the emergency support that banks will provide to help smallercompanies affected by Carillion's liquidation.

.@GregClarkMP and @AndrewGriffiths welcome banks' support for SMEs affected by #Carillion https://t.co/AEtEZK1kgZ pic.twitter.com/L7Qj2aE1LH

3.29pm GMT

Away from Carillion and over to Canada, where the central bank has raised interest rates from 1% to 1.25%. Economist James Knightley at ING gives the background:

The Canadian economy is strong and inflation pressures are rising, hence why the BoC hiked. But fears over the future of NAFTA are causing concern. This is key for the future path for interest rates

Following a raft of strong activity data and a pick-up in inflation the Bank of Canada raised the target for its overnight rate to 1.25%. This was broadly the view amongst economists and in financial markets, which had swung behind the idea of a rate rise following two consecutive bumper Canadian jobs reports and stronger inflation readings.

3.22pm GMT

Here is the Press Association story on the Carillion directors' bonuses:

Bonus payments to directors and former executives at collapsed construction giant Carillion have been stopped.

The move came amid political anger about bumper payments to executives who had been in charge as the firm headed for the rocks. The Insolvency Service said payments, including those included in severance packages for former executives, had been halted after the firm went into liquidation on Monday...

3.06pm GMT

Was there a discussion about the profit warning within the department?

Heaton says we were aware of the growing worrying signs from Carillion so we stepped up our contingency planning.

3.05pm GMT

Heaton is asked about the costs to the taxpayer.

He says this is unknown. We need to pay the official receiver for services , there may be additional costs, dislocation costs or costs of stabilising the services.

3.03pm GMT

Heaton is asked what steps and contingency plans were taken, given Carillion's profit warning in July.

He says the contract was not an easy one for Carillion and the services we were getting weren't perfect so we were working very hard to manage the contracts.

2.58pm GMT

Heaton said the priority was business continuity, vital services being maintained.

Michael Spurr, chief executive of the prison and probation service, said Carillion staff continued to work. Talks are going on with the official receiver.

2.45pm GMT

2.39pm GMT

In parliament, the public accounts committee is quizzing Richard Heaton, permanent secretary at the ministry of justice, and begins by asking about the department's exposure to Carillion.

Heaton says the main exposure is in the prison service. Carillion provided facilities management services for half of the public prisons, effectively all those south of Birmingham. The services are now being provided through the official receiver.

2.21pm GMT

Payments to former Carillion directors have been stopped from the date of the company's liquidation, says the Cabinet Office.

Minister Oliver Dowden told BBC Radio 4's World At One:

I can confirm that any payments to directors beyond liquidation date have been stopped. So these people aren't going to be paid.

Any bonus payment to directors, beyond the liquidation date, have been stopped and this includes the severance payments which were being paid to some senior executives who left the company.

2.09pm GMT

Transport secretary Chris Grayling has also defended the government's decision to hand contracts to Carillion even after its profit warning, says ITV.

Grayling said all work was given to consortia rather than individual companies, including the contracts for the HS2 rail link. He told ITV News:

It's been clear for sometime that Carillion's had issues, many construction firms have had issues over the years. HS2 did not have a contract on this project with a single company, it contracts with consortia; the whole consortia, the whole joint venture is responsible for delivering the project.

It's not for government, it's not for HS2 to exclude firms, possibly pushing them under, because of the impact on their business, arguably illegal to do so, because there's no legal reason to exclude them.

Transport secretary Chris Grayling defends awarding Carillion contractshttps://t.co/s4YTBOFdQJ pic.twitter.com/TrfICXPJQR

1.33pm GMT

Theresa May's spokesman has confirmed that 90% of Carillion's private sector clients want to keep employing its service.

That means that most staff will keep being paid (at least in the short term while the Official Receiver deals with the situation).

Some good news : PM spokesman says over 90 % of private sector companies using #Carillion say want to continue paying for services

Update/good news: Receiver has contacted all private companies that had hired Carillion. So far more than 90% indicated they wanted Carillion to continue providing those services - which means staff/sub-contractors will still be paid by the customers. https://t.co/66xJ8CpOtA

If Government is covering Carillion for public services (& private services on the basis that 90% of clients want to continue) then surely it would make sense to also do this for public & private construction... #Carillion #ukconstruction #construction https://t.co/EqBzD4jeNa pic.twitter.com/Af4VWNHqCJ

1.07pm GMT

Newsflash: Many of the Carillion staff employed on private sector contracts will continue to be paid while the company's liquidation is carried out.

The Insolvency Service has announced that most (but not all) of the companies who employed Carillion have decided that they want those services to continue, and pledged to keep paying for them.

The Official Receiver is very pleased with the level of support shown by Carillion's private sector service customers. Over the past 48 hours all of the company's private sector service customers have been contacted to determine their ongoing needs.

Over 90% of these customers have indicated that they want Carillion to continue providing services in the interim until new suppliers can be found and will provide funding which enables the Official Receiver to retain the employees working on those contracts.

#Breaking More than 90% of Carillion's private-sector service customers have indicated that they will provide funding to allow workers to continue to be paid, the Insolvency Service says

12.53pm GMT

Speaking of job losses, a Bank of England policymaker has suggested that UK unemployment will actually keep falling.

12.45pm GMT

Jeremy Corbyn also laid into Theresa May over wider issue of privatisations.

He argues that the system is broken, and that the "costly racket" of employing firms such as Carillion, Capita and Virgin to run privatised services must end.

Corbyn says Carillion is not an isolated case and system is broken. Names Virgin, Capita, Atos and G4S as corporations providing public services that 'need to be shown the door' #PMQs

Corbyn right to note remarkable fact that government contracts were still awarded to Carillion after its *third* profit warning. #PMQs

"These corporations need to be shown the door. We need our public services provided by public employees with a public service ethos..." @jeremycorbyn

"A third of the Carillion contracts with the government were let by the Labour government" @theresa_may #pmqs pic.twitter.com/QmBZdJKCYO

PMQs - Snap verdict: One of the best PMQs for ages, with strong, detailed questions, the prime minister being properly held to account, and Corbyn and May using the exchanges to make big, political arguments.

Corbyn comfortably come off best - he has the wind behind him on this issue - but May managed to pull it back a bit with her final answer. Until then, although clearly across the detail of her brief, she struck the wrong tone in at least two places. Refusing to engage with Corbyn second question just because it did not conclude with a question mark sounded petty, and her repeated insistence that the government was just a "customer" of Carillion, while technically correct, made her sound rather feeble.

12.27pm GMT

Still at PMQs, Jeremy Corbyn asks Theresa May about the future of Carillion's army of staff, and its top brass.

Q: Can she guarantee that no more money is handed to the chief executive and directors of Carillion, at a time when 8,000 workers on its private sector contracts face not being paid?

There are a number of facility management contractors who have come to an agreement with the Official Receiver which means their workers will continue to be paid.

The official receiver is doing their job and working with these companies.

Not sure this is the best #PMQs defence from May: We're a customer of Carillion, not the manager of Carillion.
Lab say that's precisely the problem with billions of pounds worth of public services at risk.

12.19pm GMT

Labour leader Jeremy Corbyn also challenges May about Carillion.

Q: Why did the government hand Carillion 2bn of contracts after it had issued a profits warning last summer?

12.09pm GMT

As expected, Carillion is a big issue at PMQs (liveblog here)

Here's a flavour:

12.05pm GMT

British banks are putting emergency measures into place to help small firms who are suffering from the collapse of Carillion.

That's according to UK Finance, the trade body that represents the industry.

"UK banks and the Government are working closely to make sure the impact of the Carillion liquidation on SMEs in the supply chain is understood and managed in a way that best supports those in need of assistance.

Lenders are contacting customers and, where appropriate, are putting in place emergency measures, including overdraft extensions, payment holidays and fee waivers to ensure those facing short term issues can be helped to stay on track."

12.01pm GMT

Over in parliament, Prime Minister's Questions is about to start.

I imagine Carillion's liquidation might come up.

11.40am GMT

Labour MP Jon Trickett, Shadow Minister for the Cabinet Office, is concerned that the Cabinet Office is keeping a close eye on Interserve's finances.

Trickett argues that the government was reckless in awarding new contracts to the firm, even after it posted several profit warnings last year.

"The Government awarded Interserve numerous contracts after significant profit warnings, clearly showing us that Carillion was not an isolated case.

"The Tory Government is wedded to a dogma which would rather see public services in private hands, so their shareholders cream off the profits and the British people pick up the bill.

Could this be another Carillion? The construction and services company Interserve was repeatedly awarded government contracts last year *after* profit warnings and a collapse in share price https://t.co/b6QOos6ncz

10.54am GMT

Here's our news story about Interserve:

10.37am GMT

Britain's architects are calling for a major rethink in how public sector contracts are awarded, in the light of the Carillion crisis.

Standard pre-qualification questionnaires (PQQs) tend to bias selection in favour of larger multi-disciplinary suppliers. In architecture this might be requirements to have three built projects of a similar type, high turnover or PI requirements and multiple accreditations.

This leads to a reliance on a small pool of large companies such as Carillion; narrowing the talent pool and concentrating risk in too few hands. Smaller business, including architects, are often restricted to being tier 2 and 3 sub-contractors who are then particularly vulnerable to overhead financial collapses of this kind, where the cashflow crisis gets passed down the supply chain.

Carillion has around 20,000 workers in the UK, but there will also be a vast impact on the many sub-contractor firms that work with Carillion, including architects. The last significant bankruptcy in construction was ROK in 2010, which we understand had annual revenue of 715 million compared with Carillion's 5,200 million; a huge difference in magnitude

10.08am GMT

Incidentally, Interserve warned in October that it could breach the conditions agreed with its lenders, after a profit warning.

Richard Fletcher of The Times points out that the warning signs have been building for a while...

If the government has only just realised that Interserve is in trouble ... they have been paying much attention. From October: https://t.co/SOtmcDKOZF pic.twitter.com/XICSmNkPPW

9.56am GMT

Interserve is like Carillion in one respect -- it may not be well known to the public, but it has a significant role in UK public life.

It employs 80,000 worldwide, including 45,000 in the UK. It plays a role building offices and car parks, and offers cleaning, catering, security and maintenance services to a range of organisations.

Interserve, the latest government contractor put on financial health watch, is largest private probation provider with 5 community rehabilitation companies in Manchester, Liverpool, Humberside and Hampshire supervising 40,000 offenders.

Despite flagging financial troubles towards the end of last year, Interserve has landed a number of hefty wins, including an extension on facility management services at the BBC worth 140m and a 227m Government contract to provide similar services for the Department for Work and Pensions.

9.33am GMT

Breaking: The World Economic Forum has highlighted the threat to environment in its annual Global Risks report.

The WEF says that the upturn in growth has led to economic risks being downgraded.

9.22am GMT

Breaking: Interserve has hit back at suggestions that its financial health is weakening.

"Last week we announced that we expect our 2017 performance to be in-line with expectations outlined in October and that our transformation plan is expected to deliver 40m-50m benefit by 2020.

This remains the case and we expect our 2018 operating profit to be ahead of current market expectations and we continue to have constructive discussions with lenders over longer-term funding.

8.56am GMT

Interserve shares are recovering some of their losses, following that vote of confidence from the Cabinet Office.

They're now down just 4%.

8.46am GMT

The Cabinet Office says it does not believe any of its suppliers are facing the same problems as Carillion.

Responding to the FT's report that it is monitoring Interserve, a spokesperson says:

We monitor the financial health of all of our strategic suppliers, including Interserve.

We are in regular discussions with all these companies regarding their financial position.

8.42am GMT

Tim Roache, the general secretary of the GMB union, has called on the government not to throw Carillion workers in the private sector to the wolves.

Speaking on Radio 4, Roache urged other firms working alongside the failed company to take them on.

"We want other private sector companies to take on Carillion workers with decent terms and conditions. But that takes time.

The government response to say if that hasn't happened in 48 hours then here's the JobcentrePlus address - that's a scandal.

8.39am GMT

Neil Wilson of ETX Capital insists that Interserve is "no Carillion", following the FT's report about Cabinet Office concerns this morning.

He writes:

It's one of the most heavily shorted FTSE stocks and it has a lot of debt. Net debt was c513m at year-end but is set to peak in the first half of 2018 as a result of refinancing, restructuring and cash flows phasing from its energy to waste contracts that were the source of the original profits warnings.

However in the case of Interserve, the arithmetic doesn't look anything like as bad as Carillion. Even if net debt tops 600m in H1 2018m, its market cap as of Tuesday's close was 176m, although this is likely to be lower today. Carillion was facing oblivion as its market cap declined to just 61m against liabilities of c1.5bn.

Interserve -15%. But company's shares no stranger to wild swings. In the past year they've had daily moves of:
-32%
-52%
-27%
+12%
+26%
+17%
+16%
+20%

8.34am GMT

Over in the City, shares in outsourcer Interserve have tumbled by over 10% in early trading.

This seems to be triggered by a report in the Financial Times that a team of UK Cabinet Office officials are watching the company closely.

Interserve has come under pressure from the increase in the national minimum wage as well as large losses on a waste-to-energy project in Glasgow.

Not only are a number of investors betting that the group's share price will fall but some of its debt is trading at a steep discount to face value.

Interserve on a Cabinet Office "watch list", reports the FT. It won a 227m DWP contract on Oct 20. The day after a monster profit warning

8.20am GMT

Here's that domino effect in action:

Boss of cleaning firm Paragon Services, Shaun Weeks, says he's temporarily stopped providing cleaning services to one prison until he gets more assurances - despite government saying funding will be provided for public services. More on Breakfast @bbc5live #Carillion

8.16am GMT

Construction experts have warned that Carillion's downfall could trigger a "domino effect" among smaller sub-contractors.

"Now we are in a very precarious position where thousands of workers don't know quite what their position is and often they can't get on site.

"Carillion actually aren't doing the work, they are relying on sub-contractors to do the actual building work.

8.02am GMT

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, business and the eurozone.

The collapse of Carillion continues to loom over the UK economy, as tens of thousands of workers face the threat of redundancy.

Subcontractors owed money by the construction and services giant are already being pressurised by their banks and have begun laying off workers, as the threat of contagion afflicting the sector was likened to a near re-run of the banking crisis.

Andrew Adonis, the former Labour transport minister, said: "It is a bit like Lehman Brothers [the Wall Street investment bank that collapsed in 2008].

European Opening Calls:#FTSE 7730 -0.33%#DAX 13172 -0.56%#CAC 5490 -0.43%#MIB 23361 -0.57%#IBEX 10480 -0.38%

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