Hedge funds and other financial speculators have made tens of millions of pounds by quietly betting that Carillion would run into financial distress.
Short-sellers, who make money by gambling that a company’s share price will fall, have been targeting the company since early 2015, but the number of bets reached a peak just before a profit warning last July that signalled the scale of its problems and sent its shares tumbling.
How did the company get into trouble?
Companies like Carillion have to keep projects on budget and keep winning new contracts. When one of those fail, problems loom.
Carilllion shocked the market in July with a massive profit warning, writing down its value by £845m, all related to key contracts. Two more profit warnings followed and the company admitted it needed cash quickly not to breach bank loan terms
At the start of 2017 shares were changing hands at 240p. This weekend they were 14p.
With debts of £900m it has been trying to arrange a £300m cash injection. However, lenders will not provide the cash without government guarantees.
What happens to the pension scheme?
Carillion has a £580m pension scheme deficit. If it collapses the government-backed Pension Protection Fund would take over the scheme, although the liability would swell, to £800m. While the Fund provides a safety net for millions of workers, there are limits on what it can pay out.
Who runs Carillion?
Chief executive Richard Howson quit after the July profit warning, with the new boss yet to start. It has been run by engineering industry veteran Keith Cochrane and the group’s chairman Philip Green, the former boss of United Utilities. Sally Morgan, who was director of government relations for Prime Minister Tony Blair, is also a director.
Carillion’s popularity with short-sellers suggests hedge funds were convinced the company was in trouble long before suspicions reached politicians and the public.
According to analysis firm IHS Markit, 18 hedge funds made £80m from the initial share slump, with much more likely to have been banked since then, after further steep falls.
The biggest winner from July’s share price crash was hedge fund Marshall Wace, whose co-founder Sir Paul Marshall was a major backer of the leave campaign in the Brexit referendum.
Another institution that took out big bets on Carillion’s downfall is BlackRock, the US-based investment institution that hired former chancellor George Osborne as an adviser last year, on a £650,000 salary.
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