Interserve agrees new lending, at a 'rather high' cost

Interserve agreed terms on almost £300m of new funding from lenders overnight, though analysts said it was at a rather steep cost in terms of interest payments and shareholder dilution.

The troubled government outsourcing company, which has been kept under a close eye by the Cabinet Office after a difficult exit from its energy-from-waste programme hit profits and put its banking terms in danger, has secured additional cash facilities of £196.6m plus up to £95m of bonding facilities to guarantee construction projects, maturing in September 2021.

The terms, including an extension to the covenant test deferral date and the maturities of facilities agreed last December to 30 April 2018, remain subject to credit approval by all providers before the new facilities are finalised.

Interserve, which employs around 80,000 people worldwide in a business that spans construction, cleaning and other outsourced services, agreed new facilities last December but has drawn £45m of the revolving credit facility and needs repay that out of these new facilities.

There will be dilution for existing shareholders, with new lenders to be awarded 10p warrants, representing around 20% of the post-issue share capital.

Following completion of the refinancing, the group will have total cash borrowing facilities of £834m, until September 2021. The interest payments are expected to be roughly £56m, of which around £34m should be cash interest in 2018.

Analysts at Canaccord said this was "rather high" and they expect a slightly higher interest expense in the following years. "The refinancing agreement that has been reached in principle is good news, removing a significant concern which has weighed heavily on the share price. The cost of the new facilities, however, appears to be steep and there is a considerable dilution for the existing shareholders."

Overall, Canaccord said shareholders "should breathe a sigh of relief that the business is refinanced, allowing the new management team to focus on delivering its business plan".

Canaccord retained its 'speculative buy' recommendation but reduced its target price to 117p from 168p based on a prospective price/earnings ratio of 7x. "Even though our previous target price was based on a more heavily discounted P/E of 5x, the additional interest expense and increased diluted share capital has resulted in a reduced target price. This has been a relatively heavily shorted stock (6-7%) and we see a bear squeeze as therefore likely."

House broker Numis said the extension of the covenant test to end April plus increased facilities "are positive steps, in that they take place against the backdrop of mobilisation of EfW projects and the contract review process by management which are ongoing - and there needs to be a line drawn on both before the group can move meaningfully forward".

Analysts adjusted their 2018 numbers for EPS of 19.7p to take account of the refinancing deal and leave all other numbers unchanged, estimating average net debt in 2018 of £600m.