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

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.

But almost 10% of those companies have not joined the agreement, making it an uncertain time for staff on those contracts.

Meanwhile bonuses and severance payments to former Carillion executives have been stopped, as of the date of the liquidation.

And there was good news for small firms hit by Carillion’s collapse. Banks have agreed emergency measures to help them keep trading and do not face a cash crunch if they are owed money by Carillion which they are unlikely to get.

Unsurprisingly, Theresa May and Jeremy Corbyn clashed over Carillion at prime minister’s question time.

Meanwhile shares in outsourcer Interserve fell sharply after a report the Cabinet Office was keeping a close eye on the company. But they recovered after the Cabinet Office said it did not believe any of its suppliers were in a similar position to Carillion. The company also maintained its financial position was improving.

On that note, it’s time to close for the day. Thanks for all your comments, and we’ll be back tomorrow.

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.

Babcock 2% probability-weighted revenue upside. In our view, Babcock could generate additional revenue from two areas: 1) Almost ten years ago, Network Rail transferred business to Babcock after the demise of Jarvis and £30-40m of Carillion’s track renewal and electrification business could follow a similar path; 2) The Next Generation Estate Contracts as Babcock previously operated two regions and has a long-standing, deep and supportive relationship with the MoD. Although it will wish to be a supportive partner to the MoD, these contracts were loss-making and require viable economic terms.

Sodexo 1% probability-weighted revenue upside. In our view, Sodexo also has a wide array of opportunities including facilities management contracts at Mapeley HMRC, Nationwide, Prisons FM, Hestia, Northwood Joint Permanent HQ, and Allenby Connaught PFI. However, the probability-weighted impact on group organic revenue growth would be a mere 1%.

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.

Carillion had a number of joint ventures with other established construction companies which should be well-placed to understand replacement risk. If Fitch considers the availability of substitute operators unlikely, given the specialised nature, size, or location of a project, our rating may be capped at that of the operator.

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.

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.

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

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.

This was reflected in the accompanying statement, which stated that “labour market slack is being absorbed more quickly than anticipated”. It also highlighted strong data, inflation being close to target and the belief that the “economy is operating roughly at capacity” as reasons to raise interest rates.

They are expecting to see a slowdown in 2018, but have had to acknowledge that “growth is expected to remain above potential through the first quarter of 2018”.

Nonetheless, there are clearly risks, most notably the potential for Donald Trump to pull the plug on NAFTA. US-Canadian trade flows total an amount equivalent to 32% of Canadian GDP so disruption would be very bad news. Uncertainty on this issue is “clouding the economic outlook” according to the statement, which is likely to weigh on business investment and trade in their view.

Consequently, the BoC still see the need for “some continued monetary policy accommodation” and warn that the Governing Council will “remain cautious in considering future policy adjustments”. Despite this the “economic outlook is expected to warrant higher interest rates over time”.

We certainly agree and see further upside to Canadian growth given the improving global backdrop and rising commodity demand. We are also encouraged by Trump’s recent comments, hinting at a growing willingness to work with Mexico and Canada on a NAFTA compromise. As such we are predicting a two more 25bp hikes in the second half of 2018.

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...

At Prime Minister’s Questions, Labour leader Jeremy Corbyn lashed out at the “wildly excessive” bonuses paid to directors.

Carillion’s former chief executive Richard Howson pocketed £1.5m in salary, bonuses and pension payments during 2016 and, as part of his departure deal, Carillion agreed to keep paying him a £660,000 salary and £28,000 in benefits until October.

Former finance chief Zafar Khan, who left Carillion in September, was due to receive £425,000 in base salary for 12 months.

Interim chief executive Keith Cochrane was due to be paid his £750,000 salary until July, despite leaving the company in February...The Prime Minister said the Official Receiver’s investigation into the firm would “look into the conduct not just of current directors but also of previous directors and their actions”.

It was possible to take action to claw back bonuses that have already been paid, she indicated. “The Official Receiver does have the power to ensure that, in reviewing payments to executives, where those payments are unlawful or unjustified he can take action to recover those payments,” the Prime Minister said.

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.

The committee moves on to other issues.

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.