Left to sink in sea of debt

When John Quigley answered his phone last Wednesday morning he knew the news was bad. On the line was Brett Martin, corporate development director of the Merseyside-based shipbuilder Cammell Laird. Martin told Quigley, the AEEU union's shipbuilding national officer, that the company's shares had been suspended. There would be an announcement later in the day.

Quigley, a laconic Scot, was uncharacteristically furious. But unlike his colleagues in the union's metals division, who publicly lambasted steelmaker Corus last month over its treatment of workers, his anger was not aimed at the company.

Instead, as he briefed colleagues, the brunt of his criticism was reserved for US cruise giant Carnival, owner of the Italian shipping line Costa Crociere, which had terminated work on an extension for its vessel Costa Classica in November - after Cammell had spent £40 million on it.

Since then, Cammell's financial position and the future of its workers had been in jeopardy. The company's shares collapsed from more than £1 in October to 6p on Thursday.

Quigley was also frustrated with the Government. In October it had not awarded any of six valuable naval support vessels to Cammell - two went to Belfast's Harland & Wolff and four to a German yard. Second, it had not provided a bankable package of support under EU rules to help Cammell win a $500m order for two cruise ships for another operator, Luxus. Quigley told The Observer: 'It is most unfortunate, because here was the first real chance to get British shipbuilding back into the profitable cruise market since the 1970s.'

Cammell lost the naval contract before Costa pulled out. Many at the Birkenhead yard feel they were penalised for creating what, last autumn, seemed like a successful business.

Meanwhile, the atmosphere at the company's Birkenhead and Tyneside yards as its 1,800 employees arrived on Wednesday was a mixture of business as usual - there are ship contracts worth £40m under way - and deep anxiety.

Ted Gilbertson, the AEEU's regional officer, heard the news on the morning TV. He said: 'People have continued to work, which is a great credit to them. But the question on everybody's minds is are we going to get paid next week? There is frustration and fear and anger because people fear the worst.' He blames the Costa fiasco, saying: 'There were two effects - the company was not paid, and it put its financial position and technical competence in question with other potential customers and with the DTI.'

When it came, at just before 5pm, Wednesday's announcement was bad, but it did not spell immediate closure at Birkenhead or Tyneside. Instead receivers were called in.

It could be the end of the line for a historic shipping name that has already had two lives. In its first incarnation, the company, founded in 1824, became one of the world's great shipbuilding names, making the Ark Royal aircraft carrier and Cunard liner Mauretania . But competition from the Far East in the 1980s undermined the competitiveness of UK shipbuilding, and Cammell followed other famous names into closure in 1993.

It was rescued by John Stafford, an accountant and owner of ship repairer Coastline Industries, who refocused on higher-margin ship repair and conversion work. Profits rose and expansion followed, growing overseas operations, which now employ 1,700. Last autumn it still appeared healthy.

Then came the Costa débcle. The Classica had sailed to Birkenhead from Genoa, but it was ordered home half way. Costa said it wanted arbitration because Cammell was overrunning its deadlines and there were technical problems. Cammell countered that independent reports said overruns could be made up, and that these and engineering problems were caused by Costa changing specifications. Jobs began to haemorrhage - some were laid off in the week before Christmas.

Corporate development director Martin said: 'They say there were technical issues but you have to ask yourself why did they send the ship off and then try to renegotiate the contract while it was at sea? I think they acted in bad faith.' But Cammell's arguments came to nothing. In January, Costa confirmed it was not going ahead.

The shipbuilder was still hopeful that the Luxus liners - contingent on a DTI aid package - would fill the gap. But negotiations with the DTI foundered. The uncontroversial part of the package was $40m of aid under the shipbuilding intervention fund. But there were problems with guarantees Luxus's bankers required and on a performance bond that the DTI required in return from Cammell. The DTI improved its offer but it was not enough. Meanwhile Stafford, the man who had rescued the business, resigned on 29 January. Martin said: 'I'm not bitter. Perhaps other governments would have tried harder.'

Last month, Cammell, creaking under debt, called in investment banker Close Brothers to restructure the company. It was too late. The trigger was a deadline this Tuesday for a £7.5m payment to bondholders, along with a £10m payment on its overdraft.

The bond payment was due on €125m (£77m) of loan notes issued in November to help finance expansion from ship repair into big-time work like Costa and Luxus.

Before the offering, Cammell had operated off a £46m overdraft facility with Royal Bank of Scotland. RBS had extended this facility, on condition that payment from Costa came in on time. It did not.

The financial markets have been expecting doom at Cammell. As bad news gathered pace, the value of the bonds followed the share price: this month they were trading at 16 per cent of face value, indicating the market expected a default.

At the time of the bond issue, analysts were puzzled as to why management had not gone for a rights issue. One said it indicated they were nervous about the Classica contract, and felt this would have prejudiced a rights issue. Martin says simply that market conditions were not favourable.

Encouragingly, ABN Amro's engineering analyst, Sandy Morris, says: 'This remains a very efficient ship-repair business. Problems started when it began to overstretch with these big contracts. There is still a viable business here.'

Receivers are negotiating with customers, including the MoD, P&O and Stena, over payment for work done on the ships currently on Cammell's books. They are also seeking a £5m overdraft for the four to five weeks during which they are optimistic a sale can be agreed.

Time may be running out, but the clock has not stopped yet for Cammell or its management.

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