UK outsourcing firm Interserve fell into administration on March 15, wiping out the investments of both powerful US hedge funds and retail investors.

The move came after shareholders voted down the Interserve board’s preferred deleveraging plan by 59% to 41%.

The firm’s fate drew comparisons with that of its former peer Carillion, the UK construction services company that collapsed into bankruptcy at the start of 2018. However, analysts have highlighted several differences between the two cases.

Control of Interserve, whose shares were cancelled at the start of this week, has already passed to its lenders in an orderly fashion. The transition should mean business as usual for suppliers at its main operating companies.

In contrast, Carillion tipped straight into liquidation, triggering near total losses for lenders and suppliers who have never received payments due to them.

The new Interserve has pledged to honour the debts and liabilities of its predecessor. “For employees, clients and suppliers at Interserve it is business as normal,” marketing and communications manager Emma Millward said on a social media channel.

“Rest assured there will be no delay to payments. Customers and subcontractors will see no difference to our services as we continue to trade as normal.”

Minimising the impact

Reports suggest that detailed contingency work was carried out prior to last week’s shareholder vote in anticipation of defeat.

It was agreed that the best way to avoid substantial loss was to appoint administrators to Interserve plc and for them to sell the business and most of the company’s assets to a specially formed company, temporarily re-named Montana 1 Limited, which will trade as Interserve Group Limited.

A Financial Times report suggests that Carillion’s fall was more disorderly and destructive because, unlike Interserve, the company relied heavily on supply-chain finance, allowing suppliers to get paid more quickly by banks in return for accepting a small discount. The company then pays the full amount back to the banks.

While this technique makes sense for large multinational companies – which effectively pay a small fee for financial institutions to more smoothly manage lumpy payments – it can also disguise a troubled firm’s mounting borrowings. Accountants do not class such facilities as debt, even though money is owed to a bank.

Despite Interserve’s assurances, the company’s subcontractors and suppliers owed money are still concerned they may not be paid.

“At present the outcome of any pre-pack administration insofar as Interserve’s supply chain is concerned remains unclear,” said Rudi Klein, chief executive of the Specialist Engineering Contractors’ (SEC) Group.

“Yet again, the financial models adopted by these large outsourcers pose an ever-present and potentially very damaging risk to their supply chains. Following Carillion’s collapse, it was generally assumed that there would be a radical re-appraisal of the public sector’s approach to construction/infrastructure procurement. This hasn’t happened.

Klein urged the UK government to adopt a three-point plan:

• Abandon the policy of letting high value contracts to outsourcers and, instead, break down contracts into smaller lots to facilitate greater SME participation in the procurement process payment system for the first time.
• Insist on the use of new model procurement options that foster greater team-working amongst all those involved in the delivery of construction /infrastructure works.
• Insist on greater payment security for construction supply chains including the use of project bank accounts (ring-fenced bank accounts through which subcontractors are paid) and/ or direct payment from public sector clients to subcontractors; if used, cash retentions should also be protected.