The end of the Iraq and Afghanistan wars have pushed this defence company to the brink

Chemring is in seriously bad shape.

The defence company put out an unscheduled profit warning on Tuesday saying operating profit for the year is set to be a third below forecasts, blaming delays to an ammunition contract. That’s £16 million ($US24.5 million) of profit being wiped out.

It’s the second stroke of bad luck for the company in as many months. In September, Chemring announced that a “significant” ammunitions contract was being cancelled by the US government.

Chemring says discussions are being held with its lenders to waive default clauses on loans and the company plans to go cap in hand to investors in the first quarter of next year to raise up to £90 million ($US138.1 million).

It’s as close to a corporate bloodbath as you can get and shares are now tanking. Chemring is down 35% this morning.

The big problem the company faces is “high levels of debt and associated interest costs,” according to CEO Michael Flowers.

Chemring bought 11 businesses between 2007 and 2012, borrowing to fund the buying spree. The company’s share price was rising at the time and it expected business to continue growing.

But the end of the Iraq and Afghanistan wars and austerity-era budget cuts have led to fewer contracts, which makes the debt harder to bear.

Net debt at the end of the year is expected to be between £155-£165 million ($US237.9-$US253.2 million), with interest payments of £15 million. Chemring’s market capitalisation is just £283 million ($US434.4 million) in comparison.

Flowers says the £90 million capital raise will be used to “fundamentally address the high levels of debt and to provide a competitive capital structure.”

NOW WATCH: The CEO who raised the price of a life-saving pill by 5000% has totally caved

NOW WATCH: Money & Markets videos

Want to read a more in-depth view on the trends influencing Australian business and the global economy? BI / Research is designed to help executives and industry leaders understand the major challenges and opportunities for industry, technology, strategy and the economy in the future. Sign up for free at research.businessinsider.com.au.