Use of this financial instrument has ballooned. No one knows to what extent because there’s no disclosure. But it was a “key contributor” to the sudden collapse of outsourcing giant Carillion.
As regulators and stiffed creditors were poking through the debris of collapsed outsourcing giant Carillion – once employing 43,000 people worldwide – they found that the UK company had hidden much of its debts. And Fitch Ratings warned that this “technique” – a “debt loophole” – may be “widespread” in the US and Europe.
Carillion provided services to governments. It didn’t manufacture anything, didn’t have a lot of assets, and didn’t have a lot of debt – at least not disclosed on its books. Net debt on its balance sheet amounted to £219 million. But Fitch estimates that it had an additional financial debt of £400 million to £500 million.
This debt was hidden by a “technique commonly referred to as reverse factoring,” Fitch says. And it was “a key contributor to Carillion’s liquidation.”
This “reverse factoring” – part of supply chain financing – allowed Carillion to hide a debt of £400 million to £500 million in “other payables,” such as money owed suppliers. There were indications that something was off: Over a four-year period, “other payables” had nearly tripled, from £263 million to £761 million. According to Fitch, “This appears largely to have been the result of a reverse factoring program.”
But this was financial debt owed to banks – not trade accounts payable.
Any disclosure?
Almost none. Fitch explained in the report (press release here):
There was one passing reference to the company’s early payment program in the non-financial section of the accounts, but nothing in the audited financial statements and no numbers.
The only clue to the scale of the supply chain financing was the growth in “other payables,” the implications of which do not appear to have been appreciated by many in Carillion’s broader stakeholder group.
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