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.