Costain said that the combination of the Prompt Payment Code and project bank accounts had restricted its cashflow. It no longer has other people's money to play with. Or not as much, anyway.
The rights issue was called as Costain reported a pre-tax loss of £6.6m for 2019 (2018: £40.2m profit).
Costain said that the growing use of project bank accounts, where retention monies are held in third party trust, means that it no longer has as much left for general working capital. Retention money is that which is already owed to a supplier or subcontractor but payment is delayed until final satisfaction of project completion – or often much later. When Carillion collapsed in January 2018, hundreds of millions of pounds of retentions owed to its subcontractors disappeared forever.
Costain has today announced a new equity capital raising of up to £100m in the next few weeks. It is fully underwritten by HSBC, Investec and Liberum, in case shareholders aren’t interested.
Explaining why it needed the money, Costain practically admitted it was because avenues of subcontractor exploitation were being closed down: It said: “There has been an increase in the use of joint operation delivery structures and project bank accounts, as clients and partners respond to the impact of the well-documented failure of certain contractors in the sector by requiring increased direct control over their financial risk profiles – this has resulted in an increase in the level of Costain's balance sheet cash being held in such joint operation structures and project bank accounts, rather than being freely available for the Group to use for general working capital purposes."
It continued: “The introduction of the Prompt Payment Code whereby contractors are required to pay their suppliers earlier has also resulted in higher working capital requirements – in response, Costain has implemented revised processes to ensure that suppliers are paid promptly, with the average time taken to pay invoices reduced to 34 days from 58 days.”
If Costain is admitting to this impact, other Tier 1 contractors are also likely to be feeling it.
Costain generated total revenue of £1,163m in 2019 (2018: £1,489m). The £6.6m pre-tax loss was blamed on previously announced contract delays, a contract cancellation and the impact of the A465 contract arbitration outcome.
The M4 Corridor around Newport project was cancelled by the Welsh government in June 2019 and Costain was also hit by delays to the £150m M6 Smart Motorway, the £200m Preston distributor road and HS2 southern section main works.