Troubled government contractor Interserve entered administration on 15 March 2019, having been crippled under the weight of its debt.
The company folded after its lenders and investors failed to come to an agreement to save it. It has been reported that Coltrane, a U.S. hedge fund and major Interserve investor, refused to agree to the suggested rescue plan which would have seen £485 million of the company’s £815 million debt cancelled in exchange for all but five per cent of company stocks. You can read more about the circumstances of Interserve’e troubles in our recent article here.
Despite the administration, there was good news for some. As part of a Pre-Pack (a pre-arranged agreement), the company’s assets were immediately transferred to a group controlled by the lenders following the administration.
Interserve said this would give the group a “solid foundation” to work from and that the company would have a “good balance sheet.” Importantly, it also meant Interserve could continue its projects as normal — protecting the jobs of its 45,000 UK-based and 68,000 global staff.
Investors and Trade Creditors Could be Set to Miss Out
However, many will still lose out. Following the administration, investors in the company saw their shares cancelled, leaving them with nothing. Another group facing potentially catastrophic consequences is trade creditors.
It is estimated that over 1,000 companies owed money by Interserve will be affected by the administration, and many could see most of the money they are owed wiped out. The value of bad-debt is likely to total millions of pounds.
As well as those that deal directly with Interserve, companies further down the supply chain could be negatively affected. Companies three or four links down the chain could lose out on payments as companies above them struggle to pay their own debts. This could put some of these companies at risk of insolvency due to unpaid invoices.
What this means is if you are a trade creditor to Interserve or an Interserve supplier, you could be at risk. A business listed as a trade creditor in an insolvency matter is three times more likely to cease trading than an equivalent business that has not been affected.
While any business can be affected by an administration, there are some characteristics that could suggest a company is more likely to face financial distress. If you or a business you deal with matches any of the following criteria, you should begin to take measures to protect yourself.
1. Businesses working on low margins often have little room to manoeuvre when hit by an unexpected missed payment. Problems may be compounded if the company struggles with other issues such as bad-debt making up a high proportion of overall revenue.
2. Some small companies that rely on Interserve for a large proportion of their revenue. Losing out on much of their income could mean these companies struggling to meet costs.
3. A sudden loss of expected cash can be devastating to companies with poor liquidity as they may be unable to find money from elsewhere to make payments.
4. Companies with a lot of debt may struggle if they can’t make loan repayments due to a loss of payments from Interserve. Companies that miss payments on their debt may be hit with further fees. This will be especially dangerous to companies working on a low margin, as high fees will eat into already minimal profits.
5. Many businesses will have costs related to Interserve projects. This could include staffing or outstanding loans from machinery bought to complete projects. While Interserve says projects will continue as planned, any change here could be especially worrying to these companies.
6. Those carrying a lot of stock for use in Interserve projects could also be hit if there is any disruption to their projects.
7. Companies without trade credit insurance will be especially hard hit as they won’t be able to receive payments from their insurance company in lieu of the money lost from Interserve. However, even companies with trade insurance may struggle to survive if they are affected by multiple issues listed above. For example, after the collapse of Carillion, Hawk Plant Hire went bust — despite it having credit insurance — because it wasn’t able to ensure sufficient utilisation of assets it had taken on finance.
Uncertainty Around Interserve Could Cause Lasting Problems
Uncertainty surrounding Interserve could cause further problems. The Guardian reported that Interserve faces risk from both competitors with interest in taking over the company’s existing contracts, and clients moving business away from Interserve due to worries over the company’s pre-administration issues.
These companies could take advantage of exit clauses that come into effect following the administration. Interserve is already thought to have lost some clients. The Guardian’s sources reported that a travel agent transferred its business to a competitor soon after the company entered administration.
Of course, clients with a legal right to walk away from Interserve may find they have leverage to use when negotiating payment of guarantees. In fact, to its end, an Interserve spokesman said the company would not walk away from its liabilities, which could result in fewer companies leaving.
Red Flag Alert Can Help Trade Debtors Spot When Customers are in Trouble
The issues faced by Interserve and potentially its suppliers show just how important it is for companies to have insight into the financial health of the companies they deal with. This could help them avoid working with clients who may be in trouble and take steps to protect themselves when clients they already work with become distressed.
Red Flag Alert data can help in this respect by providing both in-depth financial information on every company in the UK, as well as a simple to read financial health rating — based on an algorithm refined over 13 years — that predicts the probability of a business ceasing to trade within one year.
Here are some links to useful information we’ve published to help manage bad debt:
Whitepaper - How Creditor Services Data Drives Sales and Marketing
Five Tips for Managing Credit Risk
Beware the Balance Sheet: Five Points to Watch Out For
How Red Flag Alert Helps You Spot Clients That Are Overtrading
How Data Improves Credit Control Procedures
To set up a free consultation about how Red Flag Alert can help you spot when clients are at risk of folding, please get in touch with Richard West on firstname.lastname@example.org or 0344 412 6699.