A third of Carillion’s £1.5bn (€1.7bn) debt to banking partners was made up of “reverse factoring”, or supply chain finance facilities.
Among major institutes, RBS, Barclays, HSBC, Lloyds and Santander UK were owed around 60% of the construction’s company debt.
The £500m liability was accumulated under Carillion’s Early Payment Facility (EPF) programme, introduced by the company in 2013. Under the facility, Carillion’s banking partners would pay suppliers in the first instance, and then recover the capital from Carillion.
In a July 2017 update, Carillion put EPF utilisation at £412m, already up 6% from 2016. At the time, interim chief executive Keith Cochrane told investment analysts that Carillion would seek to reduce its reliance on reverse factoring.
Though a survey on Carillion’s website claimed the vast majority of suppliers were satisfied with the arrangement, its elements attracted criticism: the maximum payment term was increased from 65 to 120 days, and suppliers would incur a charge from the banks if they requested to be paid earlier. Additionally, the EPF agreement would break down should either party – Carillion or a supplier – become insolvent.
On Monday, analysts CreditSights said they believe the banks had already written off facilities to Carillion in Q3 2017. They pointed to how larger lenders all referenced “an impairment charge against a single UK corporate exposure” in their trading statements at the time. Banks referenced included RBS, Lloyds, HSBC, Santander UK and Svenska Handelsbanken.
CreditSights told Leasing Life they did not have specific estimates over the reverse factoring facility.
In related news, Federation of Small Businesses (FSB) chairman Mike Cherry said that small businesses should not suffer losses on receivables from Carillion.
He said: “It is vital that Carillion’s small business suppliers are paid what they are owed, or some of those firms could themselves be put in jeopardy, putting even more jobs at risk besides those of Carillion’s own employees.
“Sadly these kind of poor payment practices are all too common among some big corporates. Perhaps if they weren’t it would be easier to spot the warning signs of a huge company in financial trouble.
“When the dust settles on this sorry saga, there is also a wider lesson to learn about the concentration of public contracts in the hands of a small number of very big businesses. Public procurement must be much more small-business friendly, in which it is easier for small firms to navigate the system and the government should prioritise meeting its target of at least one third of taxpayer-funded contracts going to smaller firms.”
The FSB has also put up a guide to recovering receivables on its website, directed at Carillion suppliers.