How Lex Greensill helped plant the seeds of the Carillion crisis

It was October 2012. David Cameron, with the support of senior ministers and Australian financier Lex Greensill, announced a plan to speed up payments to government suppliers. new plan.

The British Prime Minister at the time described “Supply Chain Finance” Initiative The UK was just emerging from the economic recession as a “win-win” for the industry. According to the plan, the supplier’s bill is prepaid by the bank and only a small fee is charged instead of the usual 60 to 90 days waiting with the contractor. The purpose of this is to ease the cash flow of banks while maintaining vigilance against traditional loans.

Cameron didn’t know he was helping to build a central plank Caliron’s subsequent scandal.

After the British construction group was unable to repay its 7 billion pounds of debt, it entered the liquidation stage in 2018 and became one of the largest corporate failures in modern British history. At the time it had only £29 million in cash.

in the middle The crisis around Greenhill Capital, As a financial company that went bankrupt in March, the connection between Lex Greensill and Carillion is just a footnote. However, the way the outsourcer used supply chain financing to cover up its increasing debt (which could help it continue to pay dividends and dividends even if it was on the verge of collapse) can be traced back to when Cameron announced the news.

Cameron revealed that a long list of companies that have agreed to use Greensail Gale helps large companies manage payments. Some of these companies quickly realized that loans used to pay supplier bills would not appear in their reported debts, thereby helping their balance sheets to please.

Carillion’s use of supply chain finance has caused controversy because soon after the program was launched, the company extended the maximum payment time to suppliers from 65 days to 120 days-effectively forcing subcontractors to use the program even if they had to pay cost.

Greensail asks contractor for help

According to a person close to Caliron, Cameron “absolutely promoted” the supply chain financing plan and wrote to the government’s 20 largest suppliers urging them to attend the meeting held at 10 Downing Street. They were forced to Use the plan.

Carillion has never used Greensill, but its finance team met with the entrepreneur several times. Unpaid Advisor to the Cabinet Office -Have its own desk and a team of four civil servants. A former employee said that the executives “have a vision of him.”

According to people familiar with the plan, Caliron established his own “early payment facility” after meeting with Greensail, which is a version of Cameron’s announced plan.

Senior executives of some other large British contractors in the government were also invited to meet with entrepreneurs.

“There was no real threat at the time, but because the government was a big customer, it put a certain amount of pressure,” said a head of the FTSE 100 contractor at the time. “I think it is weird that No. 10 promoted the plan because Greensail was not a government official and the interest rate was very low at the time.”

An executive of another contractor said: “You won’t bite your hand.”

The outsourcer knew that Greensill got Cameron and Jeremy Heywood, then cabinet secretary, He worked with Australian financiers at Morgan Stanley. Cameron continued to work for Greensill and lobbied ministers on behalf of the company last year.

People close to the company said Greensill also participated in at least two meetings between Carillion and its subcontractors and encouraged them to use supply chain financing. At an event held at Wolverhampton Wanderers Football Club near Carillion headquarters in 2014, Greensill was appointed as the main spokesperson.

A subcontractor who participated in the Carillion event at the stadium said that the company’s use of 120 days of payment time meant that there was “a huge incentive” to use the plan. This facility allows Carillion suppliers who owe goods to pay invoices to various partner banks including RBS, Lloyds and Santander, all of which are paid in advance.

At the time, Carillion told the supplier that it intends to “provide the facility indefinitely, which is a key part of the British government’s strategy to stimulate economic growth.”

Greensill told the Financial Times that he was not directly involved in the establishment of the Carillion early payment facility and declined to comment on the Wolverhampton incident. He will provide his own version of the incident when he provides evidence for the investigation of the Select Committee of the Ministry of Finance on Tuesday.

Carillion’s customers are paying longer and longer, while the company has taken on more debt

Finance is not what they seem

In the six years before the bankruptcy, Carillion reported strong financial performance. From 2011 to 2016, its reported debt increased only slightly, from 839 million pounds to 850 million pounds.

However, in the thumbnail of its annual accounts, borrowing is rapidly swelling.The footnote under “Trade and other payables” shows The debt in the prepayment loan almost tripled, from 263 million pounds to 760 million pounds.

With the increase in debt, Carillion continued to issue generous remunerations and bonuses to directors and paid investors.

In the five years from 2012, although its operations only generated 159 million pounds of net cash, it still paid 376 million pounds in dividends. The CEO at the time, Richard Howson, could not comment. He received a salary of 5.6 million pounds and increased his pension by 1 million pounds, even though the company had accumulated a pension deficit of 990 million pounds. Later, taxpayers and retired Carillion workers paid this amount.

Bob Wylie, ” Robber capitalismCarillion’s history says that the company’s early payment system made the balance sheet look “much better than in the past.”

In a 2018 report by the Business Options Committee, Carillion supported Carillion’s use of the facility to “systematically” support its fragile financial situation and present an “optimistic picture” to the market. Rating agency Moody’s argued that as much as 498 million pounds of debt was misclassified in the annual accounts. By labeling the prepayment instrument as “other creditors,” this figure does not include the company’s debt-to-income ratio, which is an important contract test between Carillion and its lenders.

Cameron’s representative said that given the wider use of supply chain finance by many companies, it would be wrong to single out Carillon. He added: “This is total nonsense.”

Noble Francis, economic director of the Construction Products Association, said that Carillion is the “most serious abuser of the plan, but many of the largest construction companies have incorporated supply chain financing into their business models as a remedy A way of winning contracts due to low-price bidding. Or negative margins.”

The struggling British construction contractor Kier reduced its shareholding in its plan at the end of 2020, but said it would continue to provide the plan because it was “appreciated by the people who used it”.

But industry expert Rudi Klein called for a ban on supply chain financing. He said: “This is definitely a scam.” Carillion received about three months of free credit.

“Why do workers have to pay wages to get paid? I don’t think the construction industry and the introduction of David Cameron will be forgiven.”

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