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It's payback time for Interserve

David Price

Interserve’s results for 2017 dropped this morning with a £244m pre-tax loss thud.

Chief executive Debbie White was frank in her assessment, calling it an “exceptionally poor” year.

Energy-from-waste projects continued to drain cash and a reassessment of contract positions led to £86.1m in writedowns.

However, Ms White said its newly agreed £834m of financing, combined with efforts to simplify the business and reduce overheads, meant the company had been “stabilised” and given a “solid foundation” to improve on.

She also suggested Interserve would be able to draw a definitive line under its EfW misadventures by the end of 2018.

This would mean most of the holes in the good ship Interserve would be plugged – but now it needs to start paying back the debt it has taken on in recent years.

Going back to 2012, Interserve had a very different financial profile, with net cash – rather than debt – of £26m.

By 2014 this had turned into a net debt of £269m on the back of the acquisition of facilities management business Initial.

By the end of last year net debt hit £503m as the company covered EfW losses and other underperforming contracts.

Net debt will now peak at £650m to £680m by the middle of this year, according to chief financial officer Mark Whiteling.

One requirement under its new covenants is to reduce gross debt – which excludes some of its less accessible cash sources – to less than £450m by June 2020 from the £685m forecast for 2018.

That is £235m it has to pay back in just over two years.

This is a significant sum to find for all but the most rarefied businesses, and in the low-margin construction and services sectors it is a particularly daunting prospect.

For this Interserve needs cash, which could come from three sources.

The first is increased cashflow from operations, which Ms White expects to see thanks to measures that could reduce costs by £40m-£50m by 2020.

The second source is asset sales – its lenders have tasked the company with raising around £80m from selling non-core assets and businesses by the middle of next year.

Interserve’s most valuable business appears to be the equipment hire division, RMD Kwikform, which reported an operating profit of £54.4m and a margin of 23.8 per cent for 2017.

We don’t know what the management team considers ‘core’, but Interserve would need a great price for RMD to compensate for the positive cashflow it would lose, so it is hard to see that being sold.

Other than that, there don’t seem to be too many really lucrative ‘non-core’ assets that could be realised.

This leaves the final option to raise money: issuing more equity.

Interserve’s lenders already have an option to acquire new shares for 10p each up to a value equal to 20 per cent of the issued share capital.

This would raise a healthy chunk, but also hand a lot more power to the banks.

A debt-for-equity swap is another option, but this would upset current shareholders and significantly reduce Interserve’s market value.

Considering the viability of each option, it is unlikely that any one of them on its own will solve Interserve’s debt problem.

We are probably looking at some delicate combination of all three sources to reduce that debt pile.

This comes with a caveat of there being no further major contract problems and no serious deterioration in the construction and services sectors between now and 2020.

If Ms White and her team have stemmed the losses as suggested by today’s announcements, then that is no small achievement.

But reducing its debt burden by 2020 while keeping Interserve intact will be the ultimate test of Ms White’s management.

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