Carillion’s “aggressive” attitude towards supplier payments has been one of the “red flags” that encouraged hedge fund managers to short the shares in the now-beleaguered construction company which is putting its reverse factoring programme into a strategic review.
The share price plummeted by 70% from 10 July onwards on the back of a profit warning, an £845m write-down of a number of large contracts, the cancellation of the dividend and the sacking of the chief executive, Richard Howson. Average net borrowings in the first six months of the year were £695m, compared with £587m over 2016. The company announced a number of measures including disposals to shore up its balance sheet.
“We will probably seek to reduce our utilisation of reverse factoring”
Interim chief executive Keith Cochrane, previously the group’s senior independent director, said in a meeting with investment analysts that the company’s use of reverse factoring could be re-examined in the strategic review that the business is now undertaking. “Reverse factoring, in my view, has a role. It’s about how you use it to best effect and ensuring that there are good business reasons for its use,” he said.
“That is something that I will be looking at as part of the strategic review. I think it’s fair to say that over time we will probably seek to reduce our utilisation of reverse factoring but as to what form and shape that takes we will just need to wait and see. That is something that we will look at as part of the strategic and operational review and shape of balance sheet that we want, going forward.”
“When we see payment terms lengthening it’s a red flag and that’s why we shorted it.”
Hedge fund manager, Financial Times
CFO Zafar Khan, who was appointed to the role in January, told the analysts that average early payment facility (EPF) utilisation stood at £412m, up from £400m throughout 2016.
Carillion introduced a reverse factoring early payment facility in 2013 at the same time as extending payment terms up to 120 days, reportedly more than doubling payment terms for some suppliers. Carillion worked with RBS, Lloyds Bank and Santander to provide the facility.
But the programme has long been criticised. One hedge fund manager told the Financial Times that he had been “shorting” Carillion shares for a couple of years because Carillion had failed to agree invoices or pay them quickly. “When we see payment terms lengthening it’s a red flag and that’s why we shorted it,” he said.
The National Specialist Contractors Council (NSCC), which represents the interests of a number of Carillion’s subcontractors, warned four years ago: “The EPF Agreement automatically terminates in the event that the bank terminates its facility agreement with Carillion or if either party becomes insolvent. However, termination of the EPF Agreement does not affect the underlying sub-contract terms with Carillion.”
Today there is concern that if Carillion’s cash position should worsen significantly the banks may, indeed, become concerned about Carillion’s ability to repay them and withdraw the supply chain finance facility.
Its financial position will deteriorate rapidly if the company struggles to pay suppliers: “If you’re a contractor working for Carillion you’ll be worried about progress payments over next three months because they may slow down payment to the supply chain by even more than 120 days,” Rudi Klein, chief executive of the Specialist Engineers Contracting Group, told the FT.
“We live in interesting times,” said Cochrane at the close of the analysts meeting.