Capita bondholders brace for battle

By Mark Kleinman, City Editor
Bondholders in Capita, the troubled outsourcer responsible for collecting the TV licence fee, are mobilising to prepare for a radical financial restructuring of the company.
Sky News has learnt that the holders of nearly €1.6bn of Private Placement Notes (PPNs), a widely used debt instrument, have drafted in advisers from FTI Consulting to represent their interests during talks about the looming overhaul.
The appointment of FTI - which acted for the syndicate of bank lenders to Carillion, the collapsed construction giant - signals the noteholders' expectations of a tussle over the terms of Capita's restructuring.The PPNs have a major interest in the fate of Capita, which saw its shares plunge in January when Jonathan Lewis, its new chief executive, unveiled a profit warning and plans for a €700m rights issue to shore up its balance sheet.Sources said that Pricoa Capital, a subsidiary of the American financial services giant Prudential Financial, held one of the largest PPN exposures to Capita.The prospective restructuring of Capita's finances comes at a time of continued turbulence for the outsourcing sector, which was rocked by Carillion's demise.Interserve, another big player in the industry, is having its finances closely monitored by the Cabinet Office.The Sunday Telegraph reported at the weekend that tens of millions of pounds of Interserve's debt had been acquired at a big discount by Emerald Investment, a family office.The decision by the private bondholders to hire FTI comes weeks after Capita drafted in Lazard to advise on financing options.Capita delivers a wide range of service to private and public sector clients which include the NHS, Ministry of Defence, the Co-op Bank and Three, the mobile phone group.Unlike Carillion, which was largely a construction and facilities management provider, its focus is ‎on high-value, technology-enabled specialist services.
Mr Lewis, who joined Capita three months ago, ‎insisted in January that while profits for the financial year would be up to 30% lower than City forecasts, the company was not heading into the abyss."We are not under some existential threat," he said in comments reported by The Times."Did we buy up too many businesses over the last few years with too much debt on our balance sheet? Absolutely."I understand why people are making comparisons to Carillion but they are just not appropriate."The troubles at Capita have been seized upon by Labour as further evidence that the involvement of private enterprise in the delivery of public services has been a dangerous failure.Mr Lewis's "kitchen-sinking" of Capita's woes has also piled further pressure on KPMG, which audits it and faces parliamentary and regulatory scrutiny‎ over its work in the same role at Carillion.Lazard's work at Capita will examine a range of options to strengthen its balance sheet, including ‎the disposal of non-core businesses such as ParkingEye.Sources close to the outsourcer have pointed to its financial liquidity of more than €1bn, compared to the €29m of cash which Carillion had available when it went bust.
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They added‎ that Mr Lewis was taking decisive steps to address Capita's €381m pension deficit, which is roughly one-third of the company's market capitalisation.Shares in Capita, which were trading declined to comment.
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