MPs say Carillion’s supply chain financing system “hid the true extent of its massive debt”
Carillion used its early payment facility to hide £498m of borrowed cash, according to the MPs running the inquiry into the company’s collapse.
Two major credit ratings agencies, Moody’s and Standard & Poor’s, have claimed that Carillion’s accounting for their early payment facility (EPF) hid its true level of borrowing from financial creditors.
They argue the EPF structure meant Carillion had a financial liability to the banks that should have been presented in the annual account as “borrowing”.
But Carillion presented these as liabilities to “other creditors”, with Moody’s claiming up to £498m was misclassified.
Labour MP Frank Field, chair of the work and pensions committee and co-chair of the inquiry, said: “Carillion displayed utter contempt for its suppliers, many of them the small businesses that are the lifeblood of the UK’s economy.
“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. This knocks down for good the stance of the Carillion board that whingeing and blaming others can be any defence.”
While Carillion was a signatory to the Prompt Payment Code, the firm was known for being a late payer who forced standard payment terms of 120 days on its suppliers.
The EPF, also known as reverse factoring and supply chain financing, allowed suppliers to be paid earlier, in return for a discounted payment.
Field’s co-chair Rachel Reeves, the Labour MP who leads the business select committee, said: “It’s a bitter irony that while Carillion were fully signed up to the government’s Prompt Payment Code, they were making their suppliers hang on for 120 days or more to be paid.
“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.”
Some analysts noted the misclassified funds before Carillion’s collapse, with Carillion board minutes from April 2015 labelling analysis by bank UBS that factored both the pension deficit and the EPF in to Carillion’s total debt position “disappointing” .
Minutes from May 2015 said the shorting of Carillion’s shares was up significantly and that the “bulk had followed the UBS note in March”.
Santander, which was financing the EPF, withdrew it in December 2017, the month before Carillion went bust.
The bank’s decision to terminate this facility was one of the factors Carillion directors blamed for the demise.
In a letter to the joint committee inquiry, Santander said the series of events which “undermined Santander’s confidence in Carillion’s financial position” included the “lack of progress with the restructuring plan” that Santander had provided new bridging finance for and the “detailed business and restructuring plans” being further delayed.
The bank’s “outstanding exposure to Carillion in relation to the invoices purchased from suppliers under the programme is £91million” which is “separate from Santander’s committed exposures to Carillion for which we have taken significant additional bad debt provisions”.
Meanwhile, a spokesperson for the Official Receiver confirmed the jobs of a further 129 Carillion staff had been saved.
To date 11,618 jobs have been saved and 2,301 jobs have been made redundant through the liquidation, while just over 3,000 employees are currently retained to enable Carillion to deliver the remaining services it is providing.