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Carillion used invoice factoring to hide £500m debt

Carillion used its invoice factoring early payment facility (EPF) to “hide the true extent of its massive debt”, according to the Carillion joint inquiry.

As much as £498m that Carillion owed to the banks running its EPFs was “misclassified” as ‘other debtors’ rather than ‘borrowing’ in the company’s accounts, according to credit rating agency Moody’s.

Moody’s and fellow rating agency Standard & Poor’s have claimed Carillion’s accounting approach “concealed its true level of borrowing” from creditors.

Under the EPF, banks including Santander and RBS would pay supplier invoices before they were due – which could be up to 120 days under Carillion’s terms – in exchange for 2 per cent of the invoice value, with Carillion then paying the banks the full value of the invoice on its due date.

Work and pensions select committee chair and co-chair of the Carillion joint inquiry Frank Field said the contractor had treated its suppliers with “utter contempt” while using them to boost its finances.

He said: “The company used its suppliers as a line of credit to shore up its fragile balance sheet, then in another of its accounting tricks ‘reclassified’ this borrowing to hide the true extent of its massive debt.”

In March 2015 UBS pointed out how Carillion was classifying its EPF liabilities in a research note.

Over the next two months the proportion of Carillion’s stock being shorted increased from around 6 per cent to almost 11 per cent.

Carillion executives blamed the “bulk” of the increase in shorting on the “disappointing” UBS note, according to board minutes from April and May 2015.

Mr Field said: “This knocks down for good the stance of the Carillion board that whingeing and blaming others can be any defence.”

Carillion’s former finance director Zafar Khan told a select committee in February that the contractor had been “let down” by its supply chain.

Responding to the latest findings, business select committee chair and co-chair of the Carillion joint inquiry Rachel Reeves slammed the firm’s exploitation of its suppliers, some of which were now “facing ruin” following the contractor’s collapse.

“Carillion’s early payment facility ripped off their suppliers, forcing them to accept a cut in what they were owed, and was a blatant attempt by Carillion management to prop up their failing business model,” she said.

Santander operated an EPF for Carillion that had an upper value limit of £117m and was used by around 270 suppliers.

The bank has now revealed that Carillion’s failure to make progress on turnaround plans led it to curtail the EPF in December 2017.

In a letter released by the committee, Santander said it contributed £28m to a £140m bridging loan for Carillion in October 2017, which was designed to give the firm time to carry out restructuring, including selling assets and providing a detailed turnaround plan by 8 December.

Carillion failed to deliver on either front, which, combined with other financial analysis by the bank’s advisers, “undermined Santander’s confidence in Carillion’s financial position”.

As a result, the bank stopped automatically processing invoices under the EPF on 21 December.

However, it did continue to run an “ad-hoc discounting service”, under which Santander said it would process some invoices early “under our discretion”.

Between 27 December and Carillion’s collapse on 15 January, Santander paid out £14m to suppliers under the ad-hoc system.

The bank told the Carillion joint inquiry it had made a £91m total provision against “bad debt” associated with the EPF.

Santander has lost round £200m in total from the collapse of Carillion.

The contractor’s liabilities, including borrowings, money owed to suppliers and its pension fund, is estimated to be around £7bn.

According to a report in The Sunday Times, Carillion’s managers repeatedly avoided opportunities to raise new money through issuing new shares – which would have diluted the share price – in favour of taking out more loans.

A rights issue to raise cash was considered as far back as 2013, and in the first half of 2017 a plan to raise £500m on the stock market was abandoned.

Readers' comments (7)

  • It's an absolute disgrace that £500m can be 'lost' from their debt by their obviously complicit auditors. It's deceiving Clients, Suppliers and Shareholders. One would hope there will be criminal prosecutions over this matter. We stopped working for Carillion years ago over supplier finance but we see Willmott Dixon and Kiers still using it. The whole system of payment terms and retentions needs an overhaul. At the moment the tier one's have an attitude of 'take it or don't work for us'. This needs legislation to change these working practices.

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  • whilst it's understandable that people are interested in how Carillion went about it's business maybe some focus should be on current business and how they run. We had an email from one of our customers and in bold type at the end this statement 'we will never pay our invoices on less than 60 day terms' which to be honest is the root of the problem. Smaller suppliers like ourselves then expect payment on 60 days only to find many invoices are then put on hold awaiting clearance from site, so are not paid. this issue needs more focus and a law ensuring prompt payment needs to be put into place. why should large businesses be allowed to bully suppliers in this way and hold on to cash that is desperately needed by suppliers.

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  • There is a reason why Kier & Wilmott Dixon favour a Carillion style EPF facility, and it's probably the same reason that Carillion wanted it.

    If Carillion had put as much effort and ingenuity into being able to build rather than contrived accountancy (and subbie bashing) it might still be here. Accountants and Solicitors cannot build.

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  • It's fraud and it's sickening and no small company would get away with it. Time we all said no to lengthy payment terms, retentions, and onerous contract terms. These massive management companies seem to have a monopoly, how do they secure the huge amount of works when it's clear some of them rely on borrowing, monies withheld from suppliers and subcontractors, retentions etc. and as in the case of Carillion are clearly insolvent. Perhaps time to also share the works out more fairly between some of the excellent smaller contractors?

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  • We ceased working with Carillion as paying a fee for your own money due has to be illegal. We will not sign up for more than 45 days and if we start saying kier and wilmott are following the same system because behind the scenes they are broke, they may change their attitude. The whole factoring system is subby bashing and should be banned by law! PQS and clients should start the lead by taking any contractor off any project tender lists if they follow a factoring practice. After all I bet they are not giving the clients 120 to pay.

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  • The early payment system costs Main Contractors around 2% of the value. They make, errrr, less than 2% net profit, so the only way they can keep cash coming is on turnover, by getting money in faster than they pay it out. This becomes a vicious cycle with them chasing more and more turnover, which in turn pushes down margin, which etc etc etc etc………….. Avoid companies which use Early Payment Systems. In my view they are all potential Carillions. Kier et al take note.

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  • The early payment system costs Main Contractors nothing, the subbies pay for it out of their own money.

    Kier actually make money from it as they get a cut from the 2%. I was told this 'off the record' by a Kier QS.

    It's a win-win for the Main Contractors, pay the money on 120 days and get another MCD from the subbies. It's no wonder they're so keen on it.

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