How the City failed to spot Carillion's downfall
After talks between the group and the UK government about extra funding failed, the contractor filed for liquidation. The FT's Lombard columnist Matthew Vincent explains who is responsible for the company's collapse
Filmed by Petros Gioumpasis. Produced by Filip Fortuna. Footage: Reuters/Bloomberg
Transcript
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Carillion, the UK construction services company that's going into liquidation, was left with a tiny amount of cash and billions of debt, according to court documents released this morning. I'm here with Matthew Vincent, the FT's Lombard columnist, to discuss why the City failed to spot the problems that were occurring at this company, and what led to its downfall.
So there's been a lot of criticism of some Cty analysts and people who would seem to not have been doing their job. Do you think this is fair? Do you think people did fail to spot the problems at Carillion?
I think it's certainly fair to say that people who should have known better, and should have been more aware of the problems, particularly with the debt, and particularly with the difficulty in paying suppliers, paying all of the bills that Carillion owed, should have been detected. And we know that because certain hedge funds back in 2013 detected these problems. Found that Carillion was taking 120 days to pay people. And decided to short sell the shares, expecting them to fall. And therefore, they can make a profit on that sort of shorting activity.
The bigger question is why did other shareholders not spot this? People who are actually betting on share prices to rise. The long only investors. Because quite clearly, fund managers kept buying the shares, kept holding the shares. Analysts kept putting out research notes, suggesting that it was quite a good idea to hold the shares. And they were doing this for a long time, up until fairly recently, when these problems came to light.
Then there are questions about the board members. Should they not have spotted the warning signs? You've got to bear in mind that back in March, the annual report was talking about meeting expectations and everything was on track. Revenue was up. The dividend was increased. The board signed off on that when they had this massive debt problem and the pension deficit problem.
So there were lots of warning signs that should have been picked up on that weren't. And part of the reason there is the way in which these things are disclosed. You have to go through hundreds of pages if you are an equity investor invested in the shares to find these things.
At this point in time, there is no suggestion that Carillion management has done anything outside of the rules. But in your opinion, from your position and your vantage point over the Cty, do you feel that there is a chance that maybe the spirit of the rules has maybe been slightly violated here?
You're quite right. I mean, these things were disclosed, but the fact that they were disclosed on, I think, pages 78 and 81 of the annual report - in remuneration reports that ran to almost 20-odd pages of very small print - makes it difficult for people to spot.
So I think Carillion and its board can be rightly criticised for not being scrupulous enough and not disclosing in a big enough way. But it's also the part of the City to identify these things. Because if the hedge funds can, then others should be able to.
Matthew, thank you very much.