HICL Infrastructure anticipates £50m impact from Carillion collapse

The FTSE 250 company said service delivery in the period since Carillion's liquidation had been “stable”, with no material issues, as a result of the work of staff, suppliers, public sector clients and project company management teams.

Assisted by the asset management team at its adviser, InfraRed, HICL said project company management teams were also in dialogue with PwC to ensure that funds continued to flow to the Carillion subsidiaries that were being administered by the official receiver, in order to facilitate payments to staff and suppliers.

“The company has made good progress implementing its contingency plans, specifically preparing for a transition of service provision from the administered Carillion subsidiaries into interim arrangements with the previously-identified replacement operators as soon as is practical,” HICL’s board explained in its statement.

“The timely implementation of these arrangements, and of the ultimate objective of securing replacement operators for the long-term, is subject to continued constructive dialogue with key stakeholders.”

The company had previously announced that 10 projects within the HICL portfolio had facilities management subcontracts with Carillion subsidiaries.

It said the liquidation of Carillion triggered loan agreement defaults at most of those projects, and, although the projects' lenders were currently supportive of the actions underway, those projects would be unable to make distributions whilst they remained in default.

The board said the situation was expected to continue until long-term replacement operators were in place - a process that the company anticipated would take “a number of months”.

As at 30 September last year, approximately 2% of the HICL portfolio was in construction, but Carillion was not the construction contractor on any of those projects.

“There are, however, five further projects in the portfolio where Carillion was the original construction contractor and, at the time of the liquidation, held responsibility for latent defect risk,” the board advised.

“Although as a result technically in default under their loan agreements, the investment adviser is confident that these will be resolved with lenders.”

Under the public-private partnership (PPP) contractual framework, facilities management counterparty risk was transferred from the public sector to the private sector.

Responsibility for securing replacement contractors therefore sat with PPP project companies, and the associated risks fall in the first instance upon investors such as HICL.

Using the information currently available, the investment adviser developed a preliminary assessment of the financial impact of Carillion's liquidation on the company.

That assessment had been discussed with, and reviewed by, the board, and based on current information, the impact was estimated at approximately £50m of net asset value - equivalent to 2.8p of NAV per share, or 1.8% of NAV per share as at 30 September 2017 - which was incremental to a provision of £9.4m that was taken at the time of the company's interim results in respect of counterparty exposure.

“This assessment incorporates assumptions around the expected costs of the transition phase; the anticipated timing and costs of implementing long-term solutions; delays to distributions at project level; and a view on the possible impact on the valuation of these projects as at 31 March.

“The company will further update shareholders at the time of the annual results, unless the investment adviser's assessment of the financial impact changes materially in the interim in light of new information.”

The board said it was confident that the analysis did not change the dividend guidance that the company had published for the current financial year, and the two subsequent financial years.

HICL said it and its investment adviser would continue to work within the contractual framework for the affected PPP projects, “diligently” pursuing all avenues to maintain stable services in the near-term and to secure long-term, credible replacement operators, whilst seeking to mitigate the impact of Carillion's liquidation on the company.