Company’s future hinges on banks’ willingness to increase credit as money continues to haemorrhage

Jarvis is expected to propose a change to its borrowing facility to banks and shareholders, as it seeks to take its overdraft limit up to an allowed maximum of £350m.

At its extraordinary general meeting on Monday, a Jarvis spokesperson said the company would propose a change in the way its total debt was calculated. This would allow the company to exclude cash tied up in its Tube Lines investment from its total debt level.

The spokesperson said this move would give the company more flexibility to change its level of debt while it continued its asset disposal programme. “It’s not about looking for more money; it’s about sorting out an anomaly in our articles of association,” he said.

At the same time, the firm’s new chief executive, Alan Lovell, is expected to propose to Jarvis’ banks that the firm be granted an extension of its borrowing facilities until at least the end of 2005. In the summer, the firm struck a deal with its two banks, Royal Bank of Scotland and Barclays, to extend facilities until next March.

The cash crisis comes as Jarvis admitted in a trading statement issued this Monday that its financial position had worsened since that recovery deal, with expenditure increasing by an unbudgeted £80m.

One source said the firm’s finances were in a desperate state and estimating current borrowing to be at least £250m. On this basis, he said, “you are having to pay back about 7%, which is £17m a year. With a £500m-turnover firm making 4-5% margins, it doesn’t really stack up. You’re living on the edge, aren’t you? You are working for the banks, not the shareholders”.

The firm’s share price halved in value to about 15p as the market responded to the trading statement.

City experts are increasingly questioning Jarvis’ long-term future. Geoff Allum, from analyst Investec, said: “There will be life for Jarvis after this, but for how long? The banks only have so much patience.”

There will be life for Jarvis after this, but for how long? The banks only have so much patience

Geoff Allum, Investec

Sources close to the firm agreed that its present plight was concerning. One said: “It is losing cash every day. It is very worrying.”

In the statement on Monday, the firm said that 60% of the £80m extra cash outflow was from its remaining construction contracts. It also said that it been hit by a failure to sell 39 properties for £20m, and it had realised only £11m in unpaid work completed for Network Rail, £9m less than it expected.

The firm said it was in talks to bring in partners to complete outstanding construction work. The statement said: “The group continues to incur losses during the current financial year. It also means that the group now anticipates that a substantial proportion of the proceeds from its asset disposal programme is likely to be required for working capital purposes rather than repayment of debt.”

In a further statement, the firm confirmed that its schools PFI deal with Norfolk council, which it was hoping to sell to French group Vinci, had collapsed.

But it said that the sale of its European roads business and stake in the Tube Line PPP deal would be completed by December, as predicted in Building last week.

Jarvis said it had identified a further £30m in savings under the review carried out by Lovell, which would be implemented over “the next few weeks”. This will leave a core business of rail, roads and its York-based plant hire division.

But sources question how well this strategy will work. The roads business has been trading below budget, and one source claimed the rail business’ work on the West Coast main line was coming to an end.

The trading statement from Jarvis

Statement: "The group continues to operate within its debt facilities. Headroom is limited and accordingly management is concentrating on cash to ensure the group remains within those facilities pending finalisation of the disposals and refinancing within the timescale outlined above. The group's lenders continue to be kept fully abreast of developments."

Alan Lovell, chief executive: "Having completed an urgent review of the group's operational and financial status in the three weeks since my appointment as chief executive, it is clear that the restoration of the group to financial health will take longer than previously indicated. The disposals programme and new and existing cost-reduction initiatives are priorities, together with a resolution of outstanding operational issues, in particular the remaining PFI/PPP construction contracts."