1 February 2018 - Trouble at the Top

January has come and gone in a heartbeat but was anything but incident free.

The demise of Carillion, which whilst predictable was nonetheless catastrophic to the construction industry supply chain continues to reverberate as short sellers turn their attention to other prey.

Based on what has so far reached the public domain, at first glance, Carillion looks like an outlier in terms of inappropriate timing of profit recognition, fundamental loss of management control and at best, a very short term approach to bonus and dividend payments.

In a climate where apportioning blame for everything is increasingly de rigeur, executive prosecutions look inevitable and justified.

Sadly, the contagion from Carillion is spreading.

Interserve’s foray into Energy from Waste, with hindsight, looks ill advised and shareholders have born the brunt.

Another outsourcing specialist, Capita is on the ropes, with a debt pile and sizeable pension deficit to service.

Whilst it does not have, at this point at least, the zombie like appearance of Carillion, sharing the same Auditors and similar levels of leverage, combined with a profits warning is cause enough in an environment of fear to draw unwelcome comparisons.

Other industry giants have gone through their travails in recent times and some appear to be now, noting recent coverage of Laing O’Rourke.

The pressures on publicly quoted companies to deliver good news every quarter are broadly incompatible with the construction industry. Human nature dictates that we get more of the behaviour we reward.

The short to medium term outlook for those seeking surety bonds is undeniably less stable than 12 months ago. With Commercial building and Infrastructure output both receding, confidence in the sector from sureties, many of whom have trade credit divisions, is falling.

Carillion’s aggregate bonds in issue is estimated to be over £600M. Whilst not all bonds will be called upon, a very substantial loss has been provisioned for, far in excess of 2-3 years total premium into the non-bank surety market.

DRS expects capacity to tighten and rates to increase at a time when demand for surety bonds is sure to increase in both the public and private sectors, particularly where external development funding is sourced.

We will continue to work closely with our clients to maximise available surety capacity to ensure they continue to access their bonds at equitable terms.

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