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Interserve's debt 'could reach £800m'

Interserve’s growing debt mountain could peak at close to £800m, analysts have said, after the firm announced that year-end net debt would be £50m above previous expectations.

Analyst Stephen Rawlinson has said debt could continue to rise and peak “close” to the maximum facility available at £800m.

In an analyst note, he said: “[Interserve had] no deleveraging plan that we can see that does not involve further substantial dilution.

“In the meantime, with net debt expected to be £50m higher at year-end than the last guidance, the average level is likely to be well over £700m and peak may not be far from the facility of £800m.”

News that Interserve’s year-end net debt was set to hit £650m in an update this morning comes as its energy-from-waste (EfW) projects continue to damage the firm’s balance sheet.

It said today that construction had finished on the four remaining projects, although they have not yet been handed over.

The company’s update added that it had otherwise “traded robustly” in the third quarter and that its turnaround programme was delivering savings.

Speaking to CN, CMC Markets analyst David Madden said: “Interserve has been under pressure for four years now and the construction sector peaked [in terms of share price].

“They had too much debt to begin with, they are looking to trim it in 2019, but for investors we will believe it when we see it.

“Interserve has already sold off properties to bring down its debt and raise cash, but that didn’t hold [debt] back for long. Their forward order book continues to be lower than expected.

“The debt is a trigger situation and they are under intense scrutiny because of Carillion, but construction is showing signs of weakness.

“They have a struggle [on their hands] to turn around in a less fruitful environment.”

Interserve’s shares have dropped further in trading this morning, currently down 6 per cent at 32.8p, following the news that debt would be higher than the £575m-£600m previously expected.

Liberum Capital cut its target price from 50p to 35p this morning following the fall.

In a market commentary note, Mr Rawlinson said Interserve’s problems were an issue for debt-holders themselves and could potentially see the firm taken off the stock market.

“The company tell us that it is on track to show earnings in line with expectations, which are for £133m of EBITDA according to consensus data,” he said.

“So at least there is some cash coming in.

“But, with a substantial part of the tangible assets pledged to debt-holders in early 2018 used to secure some expensive borrowings, any new money will need to take into account the level of risk and the warrants for 20 per cent of the equity at 10p a share that are already in existence.

“Somebody is going to blink first in the game that is being played, as right now the new money that came in during 2018 is at risk. The debt-holders are in so far it’s their problem as well.

“The ordinary shareholders are a sideshow and have been for ages. The goverment cannot afford another Carillion as the true cost of forcing its liquidation is now emerging.

“We estimated it would be around £2bn, which may seem high but supporting Interserve is part of that cost.”

Interserve has been contacted for comment.

Interserve's debt 'could reach £800m'

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