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.
There was one passing reference to the company’s early payment program in the non-financial section of the accounts, but nothing in the...