Interserve warns it could breach banking covenants

19 October 2017 | By James Kenny 0 Comments

Interserve has dropped a further bombshell in its latest trading update. The services and construction company has warned there “is a realistic prospect” of it breaking its bank load covenants.

In the update this morning, the firm said difficult trading across some of its division has led to the prospect it may not meet the net debt to EBITDA test contained in its financial covenants for 31 December 2017. It reiterated, however, that it was engaged in “constructive and ongoing discussions” with its lenders.

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A financial adviser has been appointed to assist the group in the discussions it is having with its lenders, as well as looking at options to “maximise the short and medium-term cash generation from the business”.

A group-wide performance improvement plan, “Fit for Growth”, is also being launched, aimed at improving margin performance to industry norms.

In its update, the business said trading in its third quarter had experienced a slowdown from that reported in the first half.

In UK support services, this was driven by the continued employment cost pressures in the business, the cost of contract mobilisations, margin deterioration driven by a cost base which has not been flexible enough and contract performance in the justice business.

Interserve’s UK construction business was said to have experienced further deterioration in operating profit with “challenging market conditions and cost pressures as well as operational delivery issues” continuing to impact performance.

Equipment services was said to be performing well and as anticipated, and the international support services business has started to improve versus the first half performance. A stable performance was also maintained in international construction.

Operating profit for the overall group in the second half is expected to be approximately half the level reported in the second half of last year.

Further progress had been made on the energy-from-waste contracts in the quarter, Interserve added, but it has experienced a slippage in the anticipated completion date for some of the contracts and now anticipates, in addition to the £160m provided for in 2016, an additional £35m provision is required and significant uncertainty remains on the timing of commissioning.

Based on this provision, Interserve's additional net cash outflow for the rest of the programme is expected to be £35m.

Chief executive Debbie White said: “Despite our challenges, Interserve has a strong client base and many strengths as an organisation and I believe there is considerable potential for business improvement across the company.

“My team will focus on improving our margin performance in UK support services and ensuring good contract selection in UK construction, while reducing our cost base across the company.”

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