Reverse factoring and the collapse of Carillion
Lorenzo Migliorato covers the growing debt load that contributed to the construction giant’s failure.
Carillion’s collapse did not come as a complete surprise. In September, the construction company had warned of a £1.2bn (€1.3bn) shortfall in its balances – dwarfing the few hundred millions it had managed to raise through emergency banking facilities and restructuring – and subsequently said it was going to breach its lending covenants.
After the full extent of Carillion’s debt – £1.5bn – was revealed out of its collapse, light was also shed on what the company owed to which banks. Some £900m was owed to RBS, Barclays, HSBC, Lloyds and Santander UK. Finance leases and hire purchases constituted a small amount of the debt, reported to be £16.4m 2016, with £8.8m repayable in the period to 2022. £40m, secured against assets, was owed to London firm Glas Trust.
Carillion also ran a £500m reverse factoring facility, serviced by banks including RBS, Santander and Lloyds.
Under its reverse factoring agreements, banks would pay Carillion’s suppliers within 120 days of invoicing – or earlier, for a charge from payees – with Carillion reimbursing the banks at a successive moment. The Early Payment Facility (EPF) was introduced in 2013, with its lenders able to stop paying Carillion’s contractors should either party – Carillion or contractor – default.
The EPF had been the subject of scrutiny over a number of occasions in the past two years. In July, Carillion’s interim chief executive, Keith Cochrane, said it was considering ways to reduce reliance on the reverse factoring. Additionally, following the collapse it emerged from a High Court witness statement by Cochrane that Santander UK in December stopped paying out EPF invoices automatically, and reduced the maximum amount it would pay out from £150m to £117m. RBS, meanwhile, had told Carillion to ring-fence part of its liquidity to cover the value of the invoices, on the Friday just before the collapse.
In the end, the nightmare scenario of a default has happened. Not only will the banks need to write off EPF repayments from Carillion that will never come, but SME suppliers also fear they might never see overdue invoices paid. A contractor told trade magazine Construction Enquirer that they were owed £50,000 under the EPF; after months of procrastination on payment from Carillion, they were told immediately after the collapse that they would no longer receive payment.
Figures ranging from business minister Greg Clarke to Mike Cherry of the Federation of Small Businesses (FSB) quickly asked banks to safeguard SMEs, and lenders moved accordingly, coordinated by trade body UK Finance. HSBC launched a £100m fund for businesses affected, while RBS and Lloyds put forward pots of £75m and £50m. Lenders other than high street names also took a stance, as in the case of Reward Finance’s director Nick Smith, who asked firms to turn to asset finance for short-term cashflow needs, and Bibby Financial Services have opened up dedicated bridging finance and working capital products.
In the end, the banks seem to have moved swiftly. But SMEs are still jittery about their future cashflows. Matthew Rideout, director of business at the Institute of Chartered Accountants in England and Wales, urged suppliers to get on the phone, and added: “It takes time but it's worth it for the additional support. Make sure you’re at the front of the queue.”