Kier has launched a £264m rights issue to help pay down its borrowings and in response to increased risks to its net debt position.
In a notice to the stock market, the construction giant announced that it was looking to raise the cash despite insisting current trading was “within the board’s expectations”.
Kier’s net debt has grown in recent years and stood at £624m as of 31 October.
In its announcement, the contractor defended its financial performance but acknowledged that shareholders had increasingly paid attention to the cash and net debt position of the group.
It also said risks had increased due to lenders reducing their exposure to construction, tougher procurement processes and “increasing pressure from stakeholders to shorten supply chain payment terms”.
Kier said: “The group’s net debt is increasingly a key focus for stakeholders in the industry and the board recognises the importance of a strong balance sheet to take advantage of opportunities to underpin the group’s future performance.
“The board believes that the risks associated with the group’s net debt position have recently increased for the following reasons:
“Although the majority of the group’s banking facilities are committed until 2022, a number of lenders have indicated an intention to reduce their exposure to the construction and related sectors, which may affect the confidence of other credit providers and liquidity in the medium term and may also have an impact on access to uncommitted facilities and/or future financings;
“Potential clients and customers are increasingly focusing on service providers’ balance sheets, resulting in procurement processes becoming increasingly rigorous and automated, and;
“The increasing pressure from stakeholders to shorten supply chain payment terms.”
The firm said that the right issues was “expected to mitigate these risks, whilst also allowing the company to accelerate its debt reduction programme and increase the strength of its balance sheet”.
Kier’s share price dropped by around 20 per cent shortly following the announcement.
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The group reported net debt as of 30 June 2018 of £185.7m, as well as average month-end net debt for the year ended 30 June 2018 of £375m, calculating its average daily net debt for the year to be approximately £90m higher.
The 2018 CN100 found that Kier had increased its gross debt by more than any other contractor compared with the previous year’s analysis.
However, in a trading update earlier this month, the company revealed that average monthly net debt for the six months to the end of December was expected to be around £390m.
This compared with the average of £410m recorded for the first six months of the year.
Speaking exclusively to CN last month, Kier finance director Bev Dew said the company’s debt was appropriate given the nature of its operations, but added that it could not ignore the view of the market.
“We’re not tone deaf to the market,” the FD said. “I’ve got a [capital] structure that I can back [with operations], it works efficiently, I’ve got the support of my banks, but the market sentiment around debt has changed meaningfully since Carillion.”
In today’s statement, Kier said the average value of the assets in the group’s property and residential divisions during the year ended 30 June 2018 was approximately £460m on a cost basis, although “the directors believe that the value of these assets is higher”.
Commenting on today’s announcement, Kier chief executive Haydn Mursell said: “There has been a recent change in sentiment from the credit markets towards the UK construction sector, with various lenders indicating that they will be reducing their exposure to the sector.
“This has led to lower confidence among other stakeholders and an increased focus on balance sheet strength.
“The rights issue is intended to address these issues, better position Kier to continue to win new business and further strengthen our market leading positions.”
More to follow
Kier launches £264m rights issue as debt risks increase