Following an update released to the City yesterday, the future of health sector recruiter Healthcare Locums (HCL) looks increasingly uncertain.

The company says that since it issued its interim results for the 26 weeks ending 1 July 2012, “trading has continued to be difficult”.

In particular, the company highlights how “delays in NHS framework renewals have continued to constrain the group's ability to capitalise on its strategy of moving to higher-volume, lower-margin framework contracts in the UK”, something also noted in a previous trading statement. The update also notes weakness in the Australian market.

The company warns that it may not meet its banking covenants in March and June 2013, and has identified that “there is likely to be a requirement for additional capital funding in the next 12 months”.

The update continues: “The company is in constructive negotiations with its banking partners regarding resetting the covenants for 2013 and the company believes that the banks remain supportive of the business.

“In this regard the board has approached its two substantial shareholders [believed to be Tosca Fund and Ares Capital, who between them own 72% of the equity in the company] to ascertain their appetite to provide additional capital to the company and, while these discussions are on-going, they have indicated that they are supportive of the business going forward.

“However, no guarantee can be provided until the company is able to ascertain the quantum of the fundraising needed and any terms on which such fundraising could be undertaken. A further update will be made in due course.”

A City analyst specialising in the recruitment sector, who wishes to remain anonymous, tells Recruiter that he fears HCL’s situation is “terminal”.

“Whenever a company runs into balance sheet problems customers won’t enter into long-term relationships, while staff are concerned about whether they are going to get paid,” he says.

The analyst says there is the possibility that someone could come along and inject some capital into the business. However, he adds: “Bear in mind that HCL already had a rights issue [when a company issues equity (shares) to raise cash in order to reduce debt] in 2010. He points out another rights issue could be problematical “because people who put their money in at 10p a share will be very reluctant to put money in at 1p a share”. Last night at close of trading in London, HCL’s shares stood at 0.7p, a fall of 72% on the day, and has since fallen further to 0.48p [as of midday 24 January].

He says that it might be preferable for the company to go into administration than choose a rights issue. He explains that the danger with a rights issue is that the creditors walk away with the money raised. On the other hand, he explains, administration means that “the existing assets can be taken out of administration and used to find those assets another home”.

Another City analyst, also asking not to be named, tells Recruiter: “It looks like the company is going to run out of money. It is about to break its banking covenants – that is what the statement implies.”

The analyst says that the problem in a nutshell is that it needs “more equity and less debt”.

The analysis says there are a number of ways this could be attempted:

• the existing lenders swap some their debt for equity 

• existing shareholders take on additional equity

• new shareholders take on equity 

A spokesperson for HCL says the company has nothing to add to its trading statement.