On Wednesday we looked at the collapse of Carillion: what happened, why it happened and what the likely fallout will be. But in any corporate failure – especially on the scale of Carillion – there are winners and losers. In this article, we take a look at who won and who lost – and what the implications might be for all of us…
This is not ‘doing the results in reverse order.’ This is simply starting with what is most important and – sadly – there will be far more losers than winners. Starting with…
Carillion employed 43,000 staff around the world, with 20,000 of those staff in the UK. The Government has said that it will underwrite wages on public sector contracts – which does absolutely nothing for staff who were working on private sector contracts. They may not all be as hard-pressed as Mr. Ellis, but the simple fact is that all Carillion staff will face a very uncertain future as contracts are re-assigned, renegotiated and – inevitably – taken over by companies who will first and foremost use their existing staff.
As we wrote on Wednesday, there is a serious hole in the Carillion pension scheme. Most estimates put it at around £600m but some experts have suggested it could be significantly higher. In 2015 and 2016 Carillion made ‘deficit recovery payments’ to its pension scheme of £47.4m and £46.6m which the Pensions Regulator “considered acceptable.” Meanwhile, the company was paying considerably higher dividends to shareholders of £80m and £82.7m respectively – presumably in a bid to make investors hold the shares and avoid the sudden dive in the share price which subsequently happened on the profit warnings.
So there may well be awkward questions for the Pensions Regulator to answer – but the real losers are Carillion’s pensioners. If the company cannot be saved then the retirement fund will fall into the Pension Protection Fund, which is likely to see annual pay-outs to pensioners sharply reduced.
Spare a thought too for former employees of Carillion at or near to retirement: at a time when they most need certainty not only do they not have a job, they may now have little idea how much is in their pension fund. They will need that clarifying as a matter of urgency.
We reported on Wednesday that firms working for Carillion on purely private sector projects will have only two days of Government support: one industry group estimates that up to 30,000 firms are owed money by Carillion, with the firm having spent £952m with local suppliers in 2016. Clearly many small companies will face uncertain futures and/or will need to consider laying off staff to reduce costs: Carillion may have employed 20,000 people in the UK but the 30,000 firms owed money will have employed considerably more. There are real fears of a ‘domino effect’ among smaller companies, with liquidators PricewaterhouseCoopers saying they will not pay any bills for goods or services supplied before the liquidation date of Monday, January 15th. Carillion’s creditors have already been warned in court documents that they are likely to receive less than 1p for every pound owed to them.
Rudi Klein, chief executive of the Specialist Engineering Contractors trade group, said,
“Banks are already starting to put pressure on subcontractor firms that worked for Carillion. It is early days but there could be a potential disaster looming.”
Most of us will struggle to feel sympathy for the banks who continued to lend Carillion money. But with debts of £1.5bn, the banks are going to take a hefty hit: the question is – as Mr Klein seems to suggest – is will they try and recoup that money by putting pressure on other businesses?
As we wrote on Wednesday the government may not have been responsible for Carillion’s demise, but many ministers now look foolish at best and, at worst, downright incompetent. Long after the hedge funds and the City had started to bet heavily against Carillion shares government ministers were still awarding the company contracts and there will now unquestionably be calls for private sector involvement in public sector contracts to be significantly cut back. But the Westminster caravan will roll on: the ministers who got Carillion so spectacularly wrong will soon be in charge of other departments…
And the other big loser? All of us…
Carillion’s failure means that a raft of public sector projects – from the £745m Aberdeen by-pass to hospitals in Liverpool and the Midlands to work on HS2 – will be delayed while the contracts are re-negotiated and re-assigned. As the BBC reported this week, at the £335m Royal Hospital in Liverpool, ‘all the lights were on in the building but no work was taking place.’
You might argue that some of Carillion’s directors should be in the winners’ column, thanks to hefty salaries and bonuses. Perhaps we should leave them in limbo for now, as further bonuses and severance payouts have been blocked. The Government has already ordered a review of the conduct of Carillion’s directors – somewhat embarrassingly, as Chairman Philip Green was an adviser to No. 10 (on corporate responsibility, no less) between 2011 and 2016.
So who are the winners? Clearly, some of Carillion’s competitors will pick up attractive contracts which will – presumably – have been re-negotiated to economically viable levels. You do worry though, that Carillion was not the only company desperately seeking the next public sector contract to paper over the cracks from the last one. Interestingly, there were rumblings in some of this morning’s papers about another big contractor, Laing O’Rourke…
The hedge funds
First things first: what exactly is a hedge fund? Plenty of financial stories of late have featured shadowy ‘hedge funds’ betting against a particular company or currency. So what is a hedge fund? It’s an investment fund that pools money from individuals or institutions and invests (and takes positions) in a variety of assets. The crucial thing is that a hedge fund is not regulated in the same way that say, a pension fund or an ISA fund is regulated. That means hedge funds can borrow much more money (what is known as ‘leverage’) and operate with much greater flexibility than traditional funds – so they could make a big bet against Carillion which a normal fund most certainly could not. Hedge funds cannot deal with the general public and it is estimated that around the world they have assets totalling around $3tn.
Those big bets against Carillion? The Government may have ignored the profit warnings and the anecdotal evidence: the short-sellers did not. Carillion stock was heavily bet against and estimates are that the hedge funds will share profits of around £300m.
Finally, we have the administrators: expensive auditors who will pick up fat fees for sorting out the mess and explaining why Carillion’s own equally expensive auditors gave the company a clean bill of health. You do suspect that when the full story of Carillion is told this failure will be seen as having been inevitable for some time.
I am sorry to end the week with a relatively depressing article, but there is very little good news to be found in the Carillion debacle. But do have a great weekend, and I will be back on Monday in the company of Donald Trump and Labour Shadow Chancellor, John McDonnell, who will both be jetting off to the World Economic Forum in Davos. Talk about The Odd Couple…