Funds buying insolvent Carillion's debt 'for pennies'

LONDON • It may have collapsed under £1.6 billion (S$2.9 billion) of debt, but for some investors, Carillion still has more to offer.

Distressed debt funds bought bonds issued by the failed Britain-based builder for about two pence on the pound this week, according to people familiar with the trades. Privately placed notes also changed hands at less than five pence, they said, asking not to be identified because the trades were private.

Carillion held a range of contracts, from building roads to cooking school meals, and may retain value if some of those concessions remain in place throughout the liquidation process, the people said.

Distressed funds typically buy the debt of insolvent firms at knockdown prices, expecting it will increase in value during liquidation. Some start by acquiring small amounts, gaining access to company documents that help them decide whether to make a bigger bet.

"The liquidator will be looking at all options from selling the group as a whole to individual contract transfers," said Mr Stephen Phillips, co-head of European restructuring at law firm Orrick, Herrington & Sutcliffe, based in London.

"There may well be money that eventually flows into the estate, depending on how disputes are settled."

Many of Carillion's contracts fell under Britain's private-finance initiative (PFI) whereby companies build and operate public projects such as hospitals, schools and roads, with the government returning the money over 25 to 30 years.

Carillion's debts include an £835 million loan from banks including Barclays, Lloyds Banking Group and Royal Bank of Scotland Group... The company also has about £630 million of privately placed and convertible bonds on its books.

Britain spends £10.3 billion a year servicing PFI ventures, according to a government report.

A recovery analysis conducted in September by Slaughter and May, Carillion's legal adviser, indicated that its creditors may recover between 2.6 pence and 5.3 pence in an insolvency, the people familiar with the matter said.

Carillion's creditors are likely to get less than one pence, The Telegraph reported on Tuesday, citing a witness statement filed at the High Court by its interim chief executive.

Carillion's debts include an £835 million loan from banks including Barclays, Lloyds Banking Group and Royal Bank of Scotland Group (RBS), according to its latest earnings update and data compiled by Bloomberg. The company also has about £630 million of privately placed and convertible bonds on its books.

Pieces of the banks' revolving credit facility are being quoted at between five pence and 10 pence, the people said.

RBS and Lloyds, among the banks with the largest exposure, had already taken write-downs on Carillion in September, a person with knowledge of the matter said at the time.

Shareholders have "no prospect of any return", liquidator PricewaterhouseCoopers said in a statement on Monday.

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A version of this article appeared in the print edition of The Straits Times on January 19, 2018, with the headline 'Funds buying insolvent Carillion's debt 'for pennies''. Print Edition | Subscribe