Two funds operating in the listed infrastructure sector have announced that they have significant exposure to Carillion through the subcontracting of facilities management services on Private Finance Initiative (PFI) projects and public-private partnerships (PPP). They have recently provided details about how they will be affected by the compulsory liquidation of the company.
The biggest potential casualty is HICL Infrastructure (LON:HICL), which has said that it has a 14% exposure to Carillion spread across ten different PPP projects. Like the other funds in the sector they had been well aware of the problems at the company and had developed a contingency plan to deal with its collapse.
HICL has announced that it has now activated this plan and the fund management team is working with all the various stakeholders to ensure the continuity of service provision at the relevant projects. They are confident that a permanent replacement facilities management services provider will be secured as soon as practicable.
Shares in HICL have been falling steadily for most of January and they are now trading close to NAV with a yield of more than 5%.
The other fund most at risk is John Laing Infrastructure (LON:JLIF), which has said that 8.5% of its portfolio − equivalent to 9.6% of the NAV − is exposed to Carillion. This is divided between nine operational PPP projects comprising four schools, four emergency services facilities and one road project.
JLIF was aware that Carillion could collapse and had developed contingency plans that are currently in the process of being implemented. These will involve the appointment of new facilities management providers on the nine affected projects, which it thinks can be achieved with minimal disruption and at a minimal additional cost.
The fund does not expect Carillion’s failure to have a material impact on it, although the shares are down about 5.7% since the news and now trade at NAV with a yield of 5.9%. JLIF’s more serious problem could be the 12.1% exposure to Catalonia where it has a substantial interest in two availability-based investments concerning various Barcelona Metro Stations.
The rest of the sector has very little exposure to Carillion, but the storm clouds have been gathering ever since the announcement at the Labour Party Conference in September that a Labour government would not enter into any new PFI contracts and would bring existing contracts “back in-house”.
PFI/PPP was designed to encourage private investors to design, build, finance and operate critical public infrastructure projects such as new schools and hospitals. The idea was that the private sector delivers the infrastructure and the public sector then contracts to use it for a minimum period of 25 to 30 years with the money being used to repay the original investment, but some people believe that the costs are excessive and place an unfair burden on the public finances.
Carillion’s collapse has reinforced the political risk concerning the sector’s exposure to UK PFI and PPP projects. This has resulted in the high premiums being eroded on the listed infrastructure funds most affected. Investors should expect further volatility as each side tries to make political capital out of the situation.