Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

Carillion Plc forgot to throw in the kitchen sink when it did a management clear-out and massive profit warning earlier this year. The U.K. construction group has just issued a fresh trading alert and is warning it is likely to breach its banking covenants at the end of this year. The shares fell as much as 60 percent. It's a wonder the equity has any value at all.

The market capitalization is just 121 million pounds ($159.8 million). Average net debt for the second half of 2017 will now come in at some 1.1 billion pounds, according to Numis research. Disposals are taking longer than hoped. Meanwhile, the operational difficulties only worsen.

From Construction to Destruction
A bad balance sheet is weighing on the shares of British builder Carillion
Source: Bloomberg

Carillion needs to cut debt by over 700 million pounds, Numis reckons. The company aspires to raise 300 million from asset sales. It would be near-impossible to persuade shareholders to write a 400 million pound check for a business that doesn’t seem to have bottomed yet.

Builders' Brexit Bother
U.K. construction stumbled, then shrank as Brexit weighed on activity
Source: Bloomberg/Markit

Setting a low-enough price for a share issue would be a challenge. The shares trade at about 27 pence; analysts at UBS have a price target of just 1 pence.

It's hard to see where the balance comes from without the lenders swapping some of their debt for equity.

Carillion has a viable business but the wrong balance sheet. The lenders' best route to protecting value for themselves is to lead a restructuring that gives the group a sustainable capital structure, offering the breathing space for an operational recovery. It's in their interest to swap part of their debt for a stake while relaxing terms on the remaining borrowings.

That, in turn, would create the conditions for new equity to be provided by existing shareholders and potentially a new strategic investor alongside. Shareholders may yet have a part to play in Carillion's recovery. It's rational to believe that the equity won't be completely wiped out. But investors are at the mercy of the banks now. 

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