Carillion Plc, the second-largest construction company in the United Kingdom, went into compulsory liquidation on January 18th, 2018 – triggering an onslaught of project shutdowns, job losses, a slew of potential financial losses from trading partners and thousands of pension defaults.
The cause and extent of the negative knock-on impact is gradually coming to light – with a parliamentary briefing paper released only this week indicating that Carillion recklessly ramped up debts and sold assets worth £217 million between 2012 and 2016, to finance shareholder pay-outs. 1 The company chose to pay increasing amounts of dividends whilst cash flows dwindled – adding to an already strained financial position. Given the huge scale of the multinational company, the ramifications of this insolvency have the potential to be far and wide. Investment funds involved with Carillion are already being hit hard. However, as various parties associated with Carillion scramble to take cover it appears that numerous key PPPs (Public Private Partnerships) have wisely evaded impact.
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PPPs – Prepared for Impact
Recent research from Moody's has indicated that despite the drastic insolvency action, six operational PPPs and two construction phase PPPs rated by the credit rating agency have satisfactorily implemented contingency plans to avoid negative impact. 2 Specifically, the research pinpoints that operational services or cash flows will be maintained. The PPPs rated were involved with the Carillion juggernaut in the capacity of subcontractor and/or equity sponsor. Carillion did issue a severe profit warning in July of last year and it appears that project companies developed contingency plans at this time – preparing replacement subcontractors in case of this fatal outcome. The replacement preparations were put in place to manage Carillion related risks and liabilities and to prevent any operational backlogs. Based on these contingencies, the Moody’s assessment also indicates that the public sector will not face increased costs within PPPs following the Carillion liquidation.
Investment Funds Suffer
Meanwhile, a number of popular investment funds have not been so well positioned. Offering investors long-term, consistent income, PFI (private finance initiative) focussed infrastructure investment trusts have been a popular investor choice over the past few years. Shares in these funds have been trading at double-digit premiums in recent years. However, prices dived lower last week when news of the collapse broke.
Many infrastructure funds were exposed to Britain’s second biggest construction company and a follow up blow to prices came only days later from the National Audit Office which highlighted the unjustifiable expense of PFI projects against comparables.3
One of the hardest hit is the HICL Infrastructure Company. The company was the most exposed to Carillion - representing 14 per cent of HICL’s portfolio value and has experienced significant erosion in value. HICL traded consistently on a double-digit premium over the past decade and reaching heights of 31 per cent to net asset value (NAV) in August 2016 - that same premium is currently trading at levels close to zero. In addition, the £1.2bn John Laing Infrastructure fund, holding an equivalent of a huge 9.6 per cent of its net asset value exposed to Carillion, has been trading at its lowest valuations in almost a decade. International Public Partnerships, with less than 3 per cent exposure, has experienced a similar decade low level in valuation as share prices fell significantly. 4
As would be expected, HICL, International Public Partnerships and John Laing Infrastructure have been reassuring investors with publicly released statements on January 16th, 2018 – specifying action plans to replace Carillion on affected projects. On the upside, there has been a trend in recent years where these funds have been gradually moving away from PFI projects – choosing instead to invest in international projects and other types of regulated utilities. The exposures to Carillion have had a negative impact to investment funds, but the longer-term ramifications might not be as bad as they appear on first look.
1House of Commons Library, http://researchbriefings.parliament.uk/ResearchBriefing/Summary/CBP-8206
2 Moody’s Investor Services, Project Finance PFI/PPP, 19th January 2018
3 National Audit Office, https://www.nao.org.uk/wp-content/uploads/2018/01/PFI-and-PF2.pdf
4 Financial Times, https://www.ft.com/content/6df906c2-ffa0-11e7-9650-9c0ad2d7c5b5