Another UK Outsourcing Giant Teeters, Collapsed Shares Add to Woes of Woodford Fund that Just Froze Withdrawals

Kier shares are one of the biggest holdings of Woodford Equity Income fund.

By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.

UK construction and services giant Kier Group, with 20,000 employees, is on the ropes after issuing a profit warning, amid worries about its debt, that sent its shares spiraling down 40% on Monday and a further 2% on Tuesday, and another 4% so far today to 154 pence. The stock is down 56% over the past month and 85% over the past year and is now worth less than the price it opened at on its first day of trading back in December 1996.

Kier is one of the UK government’s top external suppliers of public services. It builds and maintains highways, railway tunnels and houses, among many other things. It even fixes domestic plumbing for local authorities, housing associations and private landlords.

But it has been struggling for years as profits shrink on the back of falling revenues from its key highway construction, home maintenance and construction businesses. At the tail end of last year, the firm announced it was planning a rights offering at 409 pence a share, in a desperate bid to raise new funds. But when push came to shove, investors — mindful that Kier just had had to revise up its levels of debt by £50 million due to an “accounting error” — purchased a meager 37.6% of the shares offered, leaving the firm with just £265 million of new funds.

That, apparently, wasn’t enough. On Monday, Kier warned of higher than expected costs and lower than expected revenues and earnings, and that it would probably report a net debt position as of June 30, just months after having forecast it would be in the black.

Kier’s latest lapse is particularly bad news for one of the UK’s largest asset management funds, Woodford Equity Income fund, for whom Kier stock is one of its biggest holdings. The fund, run by former hedge-fund star Neil Woodford, has been performing woefully for the last two years, dropping around 28% from its peak in early 2017.

Clearly bad bets were made, resulting in big losses, which in turn triggered a slow-motion run on the fund as growing ranks of investors pulled their money out. The total amount under management at Woodford has shrunk by almost two thirds since 2015, from £10.2 billion to £3.7 billion. Over the past four weeks the outflow of investors has picked up, resulting in the withdrawal of around £560 million from Woodford’s flagship equity income fund.

The final straw came this week with the decision by Kent County Council, a longstanding backer of Woodford since his days as a star fund manager at Invesco Perpetual, to request the return of approximately £250 million. This prompted Woodford to block further redemptions from his equity income fund, meaning that investors who hadn’t yanked their money out by Monday, including Kent County Council, will not be able to do so, at least until or unless the block is lifted.

“I am extremely sorry that we’ve had to take this decision,” Neil Woodford told these beaten-up investors in a video posted to YouTube. “We understand our investors’ frustration. All I can say in response to that, of course, is that this decision was motivated by your interests, our investors.”

“This is one of the bigger events for the UK asset management industry of the last decade,” a veteran fund manager who has known Woodford for more than 20 years told the Financial Times. “A bonfire of reputation and a terrible moment for investor confidence.”

Kier’s latest woes have also compounded investor fears that something is seriously amiss in the UK’s outsourcing sector, which has been rocked by scandal and controversy since the disorderly demise of industry stalwart Carillion in January 2018. Carillion’s free-fall collapse shook the foundations of Britain’s construction and outsourcing industry, triggering the bankruptcy of hundreds of supply firms, wiping out shareholders and leaving the British government holding a tab for at least £148 million.

In March this year, another industry giant, Interserve, hit the wall. This time the collapse was a bit more orderly, as employees and providers were shielded from the worst of the blowback. After a pre-packaged bankruptcy-type process, the firm’s assets became the sole property of its lenders, including HSBC and RBS, and bondholders. The firm’s shareholders, after rejecting a last-ditch debt-for-equity swap with Interserve’s creditors that would have diluted their shares to nearly nothing, ended up with nothing.

Interserve’s demise lent credence to the notion that Carillion’s collapse last year, rather than being a one-off episode, was in fact the swan song of a deeply flawed and dying business model — the outsourcing of public projects through so-called Private Finance Initiatives (PFIs) — that has made a very few, including some of the UK’s biggest banks, fabulously rich while saddling future generations with huge amounts of debt for increasingly shoddy public services the private sector is no longer able to provide.

Each time a big outsourcing firm gets into trouble, the British government lends a helping hand by giving them more and more public sector contracts to keep their balance sheet ticking over. If things get really bad, the banks stop lending the firm money, as happened with Carillion, or investors refuse to part with any more funds, as happened with Interserve.

Now, in an exquisite irony, some of the same banks that feasted on the absurdly high interest rates the UK government agreed to pay on its Private Finance Initiative deals — at times as high as 3.75 percentage points higher than the cost of government borrowing — are now themselves, thanks to Interserve’s collapse, public service providers. The question on many investors’ minds is whether a similar fate awaits Kier. By Don Quijones.

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  35 comments for “Another UK Outsourcing Giant Teeters, Collapsed Shares Add to Woes of Woodford Fund that Just Froze Withdrawals

  1. d
    Jun 5, 2019 at 11:38 am

    The outsourcing model does not work long term, as the salaries and shareholder returns demanded, are to high

  2. Double D
    Jun 5, 2019 at 12:31 pm

    A deeply flawed & dying business model that has made some of the biggest banks fabulously rich, while saddling future generations with huge amounts of debt. Sounds all too familiar doesn’t it? It’s Pay the Piper time and the misery has only begun for the world as a whole.

    • RepubAnon
      Jun 5, 2019 at 2:05 pm

      Sounds like it’s time for big bonuses for the top executives. Can’t let that money be wasted paying their debts…

    • max
      Jun 5, 2019 at 6:15 pm

      “British Central Banking
      Central banking in England rose out of the British government’s demand for funds to continue King William’s War in the 1690s, on the heels of the Glorious Revolution.
      Private creditors became hesitant to loan money to the government in this time when revenue ran desperately low.
      In 1694, the British government accepted the proposal from William Paterson to establish the Bank of England; the government received its badly needed loans in return for granting special privileges to the Bank. Paterson further demanded that the government deem the new Bank’s notes legal tender. The British government refused, but Parliament did grant the Bank the power to issue new notes to pay for government debt and the advantages of holding all government deposits. The Bank of England was thus created as a way to serve the military interests of the British Empire.

      Central banking has been a corrupt, mercantilist scheme and an engine of corporate welfare from its very beginning.”

      future generations will not pay debt — they will default on it.

      • Cynic
        Jun 6, 2019 at 3:27 am

        But of course: no bank was ever founded by a saint, although the old Italian merchant bankers did write on the first page of their ledgers: ‘For God and Profit’. Amen.

        • max
          Jun 6, 2019 at 7:50 am

          Gary North:

          “Banking is a legitimate business.

          Banking has a legitimate function. Bankers serve as intermediaries between people with money to lend and people who want to borrow. The bank locates borrowers it believes will repay the money on time, plus a rate of interest. It charges a fee to the borrowers. It pays interest to depositors. It makes money on the difference between what the borrowers pay and what it pays depositors. This activity is not inflationary. No new money is created by the banking system.
          A problem arises when banks make this offer to depositors. “If you deposit your money in our bank, we will pay you a rate of interest. But you can withdraw your money at any time.” This offer is inherently dishonest. If someone earns a rate of interest from money in a bank, then the money has to be lent to a borrower who will pay an even higher rate of interest. But this means that the money will not stay in the bank’s vault. “You can’t get something for nothing.” You cannot earn interest from money sitting in a bank’s vault. On the contrary, you will have to pay the bank for the service of storing your money in its vault. Vaults are not free resources. Neither are bank guards. So, how can the bank offer to let the depositor withdraw currency at any time? Only by using other depositors’ money to pay off the depositor who asks for his money back. The banker assumes that everyone will not want his money back on the same day. Sometimes this assumption is incorrect: during banking panics.”

  3. IdahoPotato
    Jun 5, 2019 at 12:49 pm

    Isn’t Neil Woodford the same guy who wanted to do a hostile takeover of struggling payday lender Providential Financial in 2017? He backed another failed takeover of Provident by NSF more recently. That is totally unsurprising.

    What is shocking is how public sector bodies like Kent County Council invest in Woodford’s schemes. There has to be some kind of quid pro quo going on here.

    • Jun 5, 2019 at 4:57 pm

      “What is shocking is how public sector bodies like Kent County Council invest…”

      No, it’s not shocking. It’s standard operating procedure. Investments by public entities, such as CalPERS in “alternative” assets, such as PE firms, hedge funds, etc. is now a big hot thing in the US.

      • Cynic
        Jun 6, 2019 at 3:31 am

        British county authorities are simply desperate for income, having been starved of cash by central government – largely for ideological reasons – while having to bear greatly increased costs in dealing with the wave of incapacitated elderly and other dependents, for some time, so will always be liable to take up such temptations. Nor do they employ the brightest people.

        • V8
          Jun 8, 2019 at 2:03 am

          “While having to bear greatly increased costs in dealing with the wave of incapacitated elderly and other dependants”

          Did they all get old overnight then…

          Long term poor management of all resources and definately starved of cash from poor mananagement Government, far too interested in bailing out financial institutions etc.

  4. Jack
    Jun 5, 2019 at 1:32 pm

    Great article Don, thank You.

    The UK is starting to emerge as a real embarrassment to the notion of good governance. Read( taking the lead in showing how futile is the path of intermarriage between big business and government).

    The sad story that ultimately we’re left to deal with is that we’re transferring an immense responsibility to the next generation that will curtail the healthy progress of the economic life for years to come .

    Without any recourse on the part of the tax payer ( that is ultimately left to hold the bag) , this ugly scenario is only going to exacerbate the fractured society that is taking shape.

    The battle lines are already being drawn and the sheer stupidity of it all is the fodder for these battles will be the ignorant masses that are controlled by the agendas of the Far left and the far right,

    You can except only more misery either way.

    • Stewart
      Jun 5, 2019 at 1:50 pm

      The sorry tale of the DG1 building in Dumfries , designed and built by the northern division of Kier, just about sums it all up.

      https://www.theconstructionindex.co.uk/news/view/dumfries-report-slates-kier-but-real-lessons-run-deeper

    • d
      Jun 5, 2019 at 9:54 pm

      Yes England took on American Business morals ethic’s and models from the late 50’s as America asset stripped much of its Economy.

      American style Globalisation has extrapolated this. Now we start to see the end results that were Prophesied since the late 60’s.

      The man who told me all that would happen in the early 70’s was not very nice.

      Sadly, he was totally correct. The only thing he really missed, was the way shiite Militancy/Terrorism would internationalise outside the greater MENA region.

      When Nixon opened to ccp china, he simply stated thats the begging of the end of the American’s. Then I disagreed with him, now I think he may have been correct on that also.

    • Ian
      Jun 6, 2019 at 2:27 am

      Transferring a great responsibility? You mean transferring a huge debt that can never be repaid?

  5. c smith
    Jun 5, 2019 at 2:02 pm

    Nothing like public backing for private folly to drive taxpayers nuts.

  6. stan6565
    Jun 5, 2019 at 2:21 pm

    Just another example of a failed financialisation experiment trying to defy gravity. Was it Tony Blair and Gordon Brown who based their election winning claims of “wealth and prosperity “ on this fraudulent PFI crap.

    But if you look at it, this is pervasive through all layers of all governments around the world.

    A bunch of dumb and corrupt dumbf***s, too lazy and dumb to seek and find real work, seize controls of layers of government. Councils first, then ministries and so on. And because the only skill by which they earn their living is parasitising on the dumb electorate who dumbly elect them, these “representatives“ are a fat and easy to pick target for the vultures who come to feed off the state coffers, same coffers these “state officials” are meant to protect.

    Sell off state property – hospitals, railways, motorways and airports – no problem, how nice of you to ask.
    Load liability onto future generations for today’s fraudulent PFI contracts – yes baby give it to me.
    Generate fake GDP through artificially inflated demand for say housing which is based on the wholesale theft of social security funds feeding the gigantic mass of non-domestic “beneficiaries” – well, umm, computer says yes. As well as UN policies on “population replacement “.

    I mean, the criminal negligence of the people we “elect” to manage this (or any other) country is easy to see, but there are no ways of enforcing their performance.

    Until such time when all government officials, agents, employees are subjected to the same laws that the rest of the populace are, including criminal responsibility for negligence, theft, fraud, corruption and so on, this story will just be repeating itself ad infinitum.

    But, who will make this happen? Theresa May? Boris Johnston? Jeremy Corbyn? Emmanuel Macron? Angela Merkel? The Donald? Yes, sure.

    • max
      Jun 5, 2019 at 6:26 pm

      H.L.M. :
      As democracy is perfected, the office of president represents, more and more closely, the inner soul of the people.

      read Why the Worst Get on Top in socialist states. Chapter 10 from The Road to Serfdom, by F.A. Hayek

    • stan6565
      Jun 5, 2019 at 8:48 pm

      Come to think of it, Big Don has just spilled the beans where the next gigafraud leveraged buyout and corporate pillage is targeted at: U.K. NHS.

      Please Wolf keep the site running for a few more years so when NHS goes belly up, with mass loss of life this will entail, we can all commiserate yet another victim of “free market”.

    • Auld Kodjer
      Jun 5, 2019 at 9:51 pm

      Stan6565, I believe the word you are looking for – and one which I hope makes 2019 Word of the Year – is “shitfuckery”.

      Shitfuckery was introduced by some outstanding political satire prior to the recent Australian election, but could equally apply to any of the governments and politicians you list … with a hint of vitriol.

      Excellent viewing:
      https://www.youtube.com/watch?v=OJrXI3rBbSA

  7. Andrew
    Jun 5, 2019 at 3:47 pm

    It seems to me that Capitalism is riddled with bloated CEO and administrative salaries, as well as paying off greedy shareholders and speculators with “no skin in the game.” These large businesses cannot hand out easy money to friends while pretending to provide efficient services. As usual, the taxpayer has to subsidise the inflationary costs of these deadbeat businessmen.

    • Tang
      Jun 5, 2019 at 10:13 pm

      Such corporations very common in many countries. Many of the top brass are politically well connected. In many cases these places are rich retirement grounds for step down politicians. They pay scan attention to business. What is important for them is to continue the relationship rubbing and scrubbing. Later failures they will not be blamed but will move to another equally fertile pasture.

    • d
      Jun 5, 2019 at 10:52 pm

      In the US, England, and other places you dont have Capitalism.

      You have Crony Corrupt Laissez-faire Capitalism.

      Very similar to the “Capitalism for the Elites” Mafia Dictatorship/Authoritarian States of Russia and ccp china.

      If you had normal Capitalism, which involves regulations, to protect the consumer/populace, and does not involve regular State Bailouts of failing Crony Enterprises. Many of the issue that do exist, would not.

      One of the biggest contributors to these issues, that have become global. Was the rollback in the US of Glass Stegal and various regulations that went with it. Along with allowing corporations to hold their global profits outside the US tax base. Allowing/Enabling them to turn themselves into huge crony controlled globalised monsters that now own the American political system.

      ++

      US citizens MUST pay tax on ALL their global annual income. Even if they are not US domicile.

      Yet US corporations must only pay US tax on what they Bring onshore through the front door. Not on what they bring through the back door by purchasing US Bonds and T notes, through their tax haven entities.

      This in itself is a gross inequality and ridiculous. The IRS MUST either give up its tax claim on the international earnings’s of its citicens, or tax the international earnings of its corporations as it taxes its citicens.

  8. Bi Hi
    Jun 5, 2019 at 5:49 pm

    A Fund that manages to make bad bets and lose money ….. hey, I can do that all on my own without paying anyone a management fee!

  9. Michael Fiorillo
    Jun 5, 2019 at 8:33 pm

    Gee, not only is privatization of essentially tidal public services essentially anti-social, but it’s fundamentally a bad business model, as well (even if some make out like literal bandits).

    Who’da thunk it?

    And if you want a really insidious US analogue, think charter schools and vouchers…

    • Michael Fiorillo
      Jun 5, 2019 at 8:35 pm

      … essential public services…”

      Sorry, haphazard proofreading. And the person who invented AutoCorrect deserves to burn in Hello.

      • Jun 6, 2019 at 1:30 am

        LOL. Agree.

      • kitten lopez
        Jun 6, 2019 at 10:41 am

        that was TRULY funny

  10. Leser
    Jun 6, 2019 at 2:34 am

    “so-called Private Finance Initiatives (PFIs) — that has made a very few, including some of the UK’s biggest banks, fabulously rich while saddling future generations with huge amounts of debt for increasingly shoddy public services”.

    That sums it up precisely.

    And the inventor of the PFI fraud, Tony Blair, meanwhile is estimated at £100m net worth.

    • Cynic
      Jun 6, 2019 at 3:36 am

      And dear Tony is more than ready, as he makes clear now and then, to come back and ‘serve Britain’ in any way he can.

      Who said the spirit of public service has died?

      • Gold is just..gold
        Jun 6, 2019 at 6:26 am

        LOL! But Greasy Tony, with his multi-millions, is now old and creaky and will soon face a reality check. As will we all.

Comments are closed.