Interserve has warned that the company is at risk of breaking its financial covenants with lending banks.

In a trading update today, 19 October, the company revealed it expects operating profit for the overall group in the second half of the year "to be approximately half the level of that which was reported in the second half of last year".

The Board added its UK construction business "has seen further deterioration in operating profit as challenging market conditions and cost pressures as well as operational delivery issues have continued to impact performance."

In addition, an extra £35m provision is being made for exiting contracts in the energy from waste sector, on top of a £160m provision made last year.

"Taking all of these factors into account, we now believe there is a realistic prospect that we will not meet the net debt to EBITDA test contained in our financial covenants for 31st December 2017," the Group said.

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"As previously announced, we are engaged in constructive and ongoing discussions with our lenders. We have engaged a financial advisor to assist us in these discussions, as well as looking at options to maximise the short and medium term cash generation from the business."

However, despite its financial worries the company continues to secure work, with its order book standing at £7.4 billion. Recent contract wins include; Department of Work and Pensions, Magnox, Department for Transport, Ministry of Justice, Durham University, Dandara and Liwa Plastics (Oman).

In addition, the RMD Kwikform business continues to perform well while its international construction division has maintained a "stable performance".

The company has now launched a group wide performance improvement plan, Fit for Growth, aimed at improving its margin performance to industry norms.

"As part of this, we have initiated a series of work streams to address our operating model and the cost base of our operations, as well as ensuring that we are operating in market segments which are both profitable and offer opportunity for growth," the Group continued.

"We have also initiated a comprehensive contract review across both the support services and construction businesses."

Debbie White, Chief Executive, said: "Despite our challenges, Interserve has a strong client base and many strengths as an organisation and I believe there is considerable potential for business improvement across the company.

"My team will focus on improving our margin performance in UK support services and ensuring good contract selection in UK construction, while reducing our cost base across the company."

(LM)