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Carillion collapse overshadows weak start for Europe

High Speed Rail, Construction

High Speed Rail, Construction

European markets have got off to a quiet start despite a positive Asia session which saw the Nikkei 225 hit another 26 year high, despite a Japanese yen which is trading at its best levels since September last year.

It looks set to be a fairly quiet session in the absence of the US for Martin Luther King Day with the main corporate story of the day surrounding troubled UK construction and support services giant Carillion.

It appears to be the end of the road for Carillion, one of the UK’s biggest construction companies, as it files for compulsory liquidation having run out of time to put together a restructuring package with its lenders.

The likelihood of a government bailout would appear to be remote, though the outstanding public sector contracts are set to taken in-house and run by the UK government. In terms of assets Carillion based on its 2016 accounts has tangible plant and machinery of £144m, a fraction of its overall debts, not to mention the £800m pensions liabilities.

Whether these services will then be tendered out to another provider in order to recoup some costs may well be difficult given the potential political fallout.

Some have suggested that given the recent profit warnings the new contracts issued by the government since the summer should not have been awarded.

With the benefit of hindsight these are valid questions, however a profit warning even of itself does not mean that a company is insolvent. After all Balfour Beatty underwent similar problems a few years ago, restructured the business and is still trading now. There are certainly questions to answer with respect to due diligence but that offers no guarantees of warning of potential problems in the case of future contracts.

As things stand any outstanding contracts are likely to have to be re-tendered by the government, particularly in the case of large scale projects like HS2, while the pension liabilities are set to be picked up by the Pension Protection Fund.

With respect to the rest of the construction and support services sector, Carillion’s woes don’t appear to have translated into any adverse movements in their peers share prices, however the impact on its suppliers and smaller creditors could well be severe, as they probably won’t get paid what they are owed.

The US dollar has continued to come under pressure hitting three year lows against a basket of currencies losing the most ground against the commodity currencies of the Australian dollar underpinned by higher copper and gold prices, which is also helping underpin the mining sector.

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