Interserve shares sink as it battles to avoid Carillion's fate

By Noor Zainab Hussain

(Reuters) - Shares in Interserve (NYSE: IRV) lost more than half their value on Monday after the British support services provider said it was in rescue talks which may hand control of the company to creditors in a bid to avoid a Carillion-style collapse.

The Reading-based outsourcer, which employs 75,000 worldwide and has thousands of UK government contracts to clean hospitals and serve school meals, said on Sunday it would seek to cut its debt to 1.5 times core earnings in talks with lenders it hopes to complete early next year.

Chief Executive Debbie White said that the company was trading well and in line with expectations for 2018, and that the debt reduction plan, first floated in a refinancing in April, had government support.

But the moves add to a sense of crisis around the company, whose value has slumped from over a billion pounds in 2014 to just 9.7 million pounds ($12.4 million).

Carillion's collapse in a mass of debt and pensions dues in January forced the government to step in to guarantee services ranging from roadworks to school meals and led to a parliamentary inquiry into the extent to which private companies should be running essential services.

Prime Minister Theresa May faces a 148 million pound bill from the collapse, according to estimates from the National Audit Office and her government now wants the likes of Serco (NYSE: SRP) and Capita (NYSE: CPI) to show that contracts can be transferred to peers if they fail.

"We monitor the financial health of all of our strategic suppliers, including Interserve, and have regular discussions with the company’s management," a spokesperson for the British government's Cabinet Office said in an emailed statement, adding that it does not believe that any of its strategic suppliers are in a comparable position to Carillion.

Interserve's combined credit score, which measures on a scale of 100 to 1 how likely a company is to default on its debts in the next year, was "1", according to Refinitiv Eikon data, indicating it was expected to default.

"While trading is in line we believe that it is hard for Interserve to get credit insurance or win new contracts, given the current environment and its leverage," Liberum analyst Joe Brent, said.

"We struggle to see any scenario, which leaves much, or any value, for the current equity … valuation is close to irrelevant given the financial risks."

Shares closed over 53 percent lower at 11.5 pence on Monday.

(Graphic: Carillion peers still reeling after high profile collapse - https://tmsnrt.rs/2zQ2YQe)

GOING UNDERGROUND

Interserve, which maintains eight out of 10 of Britain's busiest railway stations and cleans 2,490 London Underground carriages every evening, warned in November that its debt would rise more than expected this year.

It said then that it expected year-end net debt in a range of 625 million pounds to 650 million pounds ($795-$830 million), citing project delays and a weak construction market.

Sky News reported on Monday that the firm's creditors had hired Lazard to advise on the terms of a 600 million pound rescue deal. Lazard and Interserve did not immediately respond to a request for comment on the report.

Separately, the BBC cited sources close to Interserve's creditors as saying that lenders recognized they may have to write off some of the loans to stave off a collapse but still supported company management.

UK trade union Unite, which has 1,200 members working at the firm, said it would support opposition Labour Party proposals to ban the company from bidding for public contracts until its future is clear, also calling for ministers to lay out contingency plans.

"We could be facing Carillion Mark Two," Unite assistant general secretary Gail Cartmail said.

Another major contractor, Kier Group (NYSE: KIE), announced a surprise plan two weeks ago to tap shareholders for 264 million pounds, blaming the reluctance of banks to lend to builders.

Danish support services company ISS (NYSE: ISS) on Monday announced its own plan to raise up to 2.5 billion Danish crowns ($381 million) from selling businesses.

"The phrase ‘too big to fail’ will inevitably be trotted out (for Interserve)," said Julie Palmer, a partner at restructuring consultants Begbies Traynor.

"But it is going to be sensible management and sound financially grounded decisions that help this giant of a company survive long-term. It can’t just keep receiving financial adrenaline through rescue packages."

(Reporting by Noor Zainab Hussain and additional reporting by Arathy Nair and Sangameswaran S in Bengaluru, Paul Sandle in London; editing by Patrick Graham, Keith Weir and Adrian Croft)

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