Trickle-down effects of cuts made by the government are continuing to impact large UK outsourcers, pushing companies into financial issues as vital sources of revenue shake up their already fragile books.
The measures are part of a public procurement overhaul that has seen Whitehall reduce its reliance on big businesses. The subsequent crisis has led to a sharp drop in the market for building contractor Carillion, whose shares are now at an all-time low of 57.2 points in value.
Emergency funding necessary
A debt of almost £700m has been predicted for Carillion’s first half of the trading year, while its pension deficit stands to more than double to £800m. The company, which employs 50,000 individuals worldwide, announced in mid-July that it has added HSBC to its list of financial advisors, in a bid to help it stay solvent.
Analyst Andrew Nussey from Peel Hunt LLP said that Carillion "...probably needs to find £500m through disposals and an equity raise”. Other commentators have suggested that a fundraising effort would be the other likely rescue strategy, pointing to the fact that the sale of any single one of its divisions wouldn't be enough to meet the capital needed.
Over-reliance on capital sources
Carillion's troubles have largely come from too much dependence on a single type of funding. The contractor has worked with the government for a long time with lucrative returns, but has recently seen the value of its public-sector contracts drop 81%.
In a bid to reform its own finances, Whitehall has been diversifying the organisations it works with, introducing a directive to cut use of large outsourcers to less than 5% of total contractors for deals struck in the past year. The policy has had a knock-on effect on Carillion and similar businesses, as these kinds of projects have been key sources of capital for a long time.
This has caused further difficulties as the firm needed a significant revenue stream to plug its pension deficit, which is continuing to rise – showing the importance of a strong cashflow and sufficient reserves to avoid debt issues.
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