The announcement on Friday resulted in the share pricing diving a third, wiping hundreds of millions off company value.
Kier's net debt at the end of October 2018 was £624m. The board said that rights issue was needed because the risks associated with operating with such big debts had increased since the collapse of Carillion. It said that the government would not give work to firms that look like they might go bust; banks have gone shy on the construction industry; and it can no longer get away with shafting its suppliers.
The official statement announcing the rights issue put it more wordily. It said: “The board believes that the risks associated with the group's net debt position have recently increased for the following reasons:
"– although the majority of the group's banking facilities are committed until 2022, a number of lenders have indicated an intention to reduce their exposure to the construction and related sectors, which may affect the confidence of other credit providers and liquidity in the medium term and may also have an impact on access to uncommitted facilities and/or future financings;
"– potential clients and customers are increasingly focusing on service providers' balance sheets, resulting in procurement processes becoming increasingly rigorous and automated; and
"– the increasing pressure from stakeholders to shorten supply chain payment terms."
The rights issue, which is fully underwritten by Numis Securities, Peel Hunt, Citigroup, HSBC and Santander, is expected to accelerate debt reduction and strengthen the balance sheet.
Kier reported net debt as at 30th June 2018 of £185.7m. Average month-end net debt for the year ended 30th June 2018 was £375m and average daily net debt for the year to was £90m higher. The average value of the assets in the Property and Residential divisions was £460m in the last financial year on a cost basis, although the directors believe that the value of these assets is higher.
The net proceeds of the rights issue are expected to be £250m, allowing it to target an annualised average net debt to Ebitda ratio of less than 1x.
Chief executive Haydn Mursell said: "There has been a recent change in sentiment from the credit markets towards the UK construction sector, with various lenders indicating that they will be reducing their exposure to the sector. This has led to lower confidence among other stakeholders and an increased focus on balance sheet strength. The Rights Issue is intended to address these issues, better position Kier to continue to win new business and further strengthen our market leading positions."
Kier’s share price dropped by 33% on the news on 30th November, from 752 pence to 505 pence per share. This cut the stock market value of the company from £821m to £492m.