One of World’s Construction Giants Admits Using Risky Hidden-Debt Loophole “Across Group.” Australian Subsidiary Crushed

This “crack cocaine for CFOs” was also extensively used by Carillion until it collapsed.

By Nick Corbishley, for WOLF STREET:

The world’s seventh largest construction and services company (by sales), with subsidiaries around the globe, Grupo ACS, has revealed it is making extensive use of reverse factoring, a controversial financing technique that played a key role in the collapse of UK construction giant Carillion. In a conference call with analysts, ACS chairman, Florentino Perez, said the firm has been rolling out factoring “across the group,” to “more efficiently manage cash flows and match revenues and costs over the course of the year.”

The admission by ACS that it is using reverse factoring of payables across its vast global empire has spooked investors, given the malign role this supply chain financing tool played in the collapse of Carillion. As Fitch ratings wrote in a report last year that reverse factoring essentially served as a “debt loophole,” enabling Carillion to hide the true scale of its growing debt load. But not indefinitely. In January 2018, it collapsed in almost free-fall fashion under the sheer weight of that debt.

The global operations of ACS, a Spanish company, are significantly larger than Carillion. Its decision to disclose its use of factoring was probably prompted by recent allegations from Hong Kong research group GMT about the rampant use of reverse factoring of payables and other “accounting shenanigans” at ACS’ Australian subsidiary, CIMIC, which is majority owned by ACS’s Germany subsidiary, Hochtief.

In a report released on April 30, GMT Research said that CIMIC, which builds many of Australia’s biggest infrastructure projects, was using “factoring agreements” with banks and financial institutions to create the illusion of cash flow, reduce the appearance of debt, and lower the appearance of its leverage ratios.

CIMIC initially responded to the accusations by saying its accounts are fully audited, fully compliant, and accurate. But that didn’t seem to work. So, in its half yearly report in mid-July it admitted that its factoring level was close to $2 billion, though it did not differentiate between “reverse factoring” and classic “factoring.” Like most companies, CIMIC lumps the two together on its balance sheet under “trade and other payables.”

In July, the company also reported weaker half-year results than expected, including significantly lower operating cash flow. The news triggered a brutal sell off of its stock, which tumbled 19% in one day’s trading. The shares are now at a three-year low, having plunged 29% since mid-July and 35% since GMT first published the report:

Investors are clearly worried, and probably with good reason. According to Australia Financial Review, “CIMIC has developed a reputation for poor transparency” since its takeover by ACS in 2014, “refusing to answer questions from the media and refusing interviews, even when it reports financial results.”

Here’s how reverse factoring works: a company hires a financial intermediary, such as a bank or a specialist firm to pay a supplier promptly (e.g. 15 days after invoicing), in return for the supplier accepting a small discount. The company repays the intermediary at a later date, often on more extended terms than it had with the supplier.

Both sides feel like they have benefited: the supplier gets quick access to the cash it’s owed, albeit at the price of forgoing a small piece of that cash, while the buyer is able to borrow money without having to disclose it as debt, meaning that it can extend its payment terms and expand its borrowing, while maintaining its leverage ratios.

Investors and auditors are often left none the wiser, since it’s entirely up to the company whether it chooses to classify this new debt as a loan or as trades payable. Most choose the latter. It is virtually impossible to discern by looking at a company’s trade payables whether reverse factoring of payables is being included unless the company expressly says so. Most choose not to.

And it’s not just CIMIC that is making extensive use of factoring and reverse factoring, but ACS’s entire global business. ACS said in its interim results released on Monday that its total factoring bill was running at €2.3 billion ($2.7 billion) at the end of June. Hochtief said it had factored €1.7 billion. Neither company differentiated between factoring and reverse factoring, so investors are still not much the wiser.

Reverse factoring has been in practice for decades but has hugely expanded in recent years, although no one really knows by how much due to the lack of disclosure by the firms that use it. As cash flows get squeezed and debts are piling up, the temptation has grown to use reverse factoring to improve the outward appearance of cash flows and reduce the outward appearance of “debt” and their leverage ratios. Banks and specialized financial institutions in the supply chain finance industry are more than happy to meet that demand.

“This is crack cocaine for CFOs,” says Dean Paatsch, of Australian governance advisory service Ownership Matter. “Once they start using it, it’s very difficult to stop.” Large users include telecoms, consumer good companies, chemicals, retail, aerospace and, of course, the construction industry.

Getting addicted can be dangerous. When a company gets into financial distress, its bank simply cancels the reverse factoring program, leaving the company stranded and having to scratch together enough funding to pay down its accounts payable to the terms agreed to with suppliers. For a company that is already in dire financial straits and whose last major source of cash flow has just disappeared, it’s an impossible task — hence the reason why a 200-year old company like Carillion collapsed so quickly and with so little warning. By Nick Corbishley, for WOLF STREET.

The bitter irony: As Draghi’s term is about to end, investor expectations plunge to where they’d been when he made his “whatever it takes” speech in 2012. Read…  Investor Sentiment Goes to Heck After Draghi’s Easing Promise

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  43 comments for “One of World’s Construction Giants Admits Using Risky Hidden-Debt Loophole “Across Group.” Australian Subsidiary Crushed

  1. 2banana says:

    Not that long ago…GAAP and fraud laws were enforced and bankers and CEOs went to jail on a fairly regular basis.

    Now fraud and corruption are “dealt with” with a fine, at worst case. So fraud and corruption just becomes part of the business model.

    And we wonder why Jon Corzine, Wells Fargo senior management and housing bubble fraud goes unaccountable.

    • Lemko says:

      Indeed… Excellent Article

    • gary says:

      Tesla news always mentions “suppliers”. Is this what is happening at Tesla maybe?

      • Nat says:

        From the negative Tesla news about suppliers it sounds more like Tesla just doesn’t pay some of its suppliers as opposed to some sort of factoring scheme. But who knows, maybe both are in play.

  2. stan6565 says:

    Like running your business cash flow on an Amex credit card. All nice and lovely as long as you pay in full by month end. If not, big Tony comes to remove your car from your driveway, and then, next month, you from your house.

  3. David Hall says:

    Not long ago Sydney, Hong Kong and Vancouver were some of the most obvious housing bubbles reported by real estate analysts. Australia avoided a recession for 28 yrs. Home prices turned down there recently. Not sure where they go from here.

    During the Great Recession it was reported bank fraud was one of the causes of the crash. That was when borrowers lied about income on their loan applications. It is a crime.

    • William Smith says:

      It was the banksters who (illegally) cooked up the loan applications to make it look like the applicants could easily service the debt. That toxic debt was pushed at financially illiterate people by the banksters for quick fees and commissions. And it was the braindead “quants” whose imbecilic “models” said house prices could never go down. The ratings agencies who were *paid*by*the*banksters* said that the debt was “good” (and thus acted immorally, if not criminally). If the banksters did proper due diligence as legally required, then NONE of those “liar loans” would have got through. So, no, it was not the borrowers who were at fault. They were only guilty of being stupid (which is not illegal).

      • RD Blakeslee says:

        It’s easy to forget the role “liberal” pols played, pushing the banks to lend to the “victimhood”

        Christopher Dodd and Barney Frank come to mind:

        • VT says:

          Start with the repeal of Glass-Steagal that allowed financial piracy to spead like ebola

      • polecat says:

        Well, of course not …. that’s why they’re .. BANKSTERS !!!!

        So now it appears that the “illiterates” have moved right up the grifting ladder. What a towering inferno – I say let it all burn down ! You know its gonna happen eventually.

      • max says:

        Moral Hazard of Central Banking and fractional reserve fiat money

        Walter Bagehot:
        If the banks are bad, they will certainly continue bad and will probably become worse if the Government sustains and encourages them. The cardinal maxim is, that any aid to a present bad bank is the surest mode of preventing the establishment of a future good bank.

        • Dale says:

          Bagehot had 3 conditions for lending during a crisis. Bernanke violated them all. Because corruption.

    • Brennan huff says:

      We should have arrested a million Americans

      • VT says:

        1 million just in banks around the world,everyone who did a liar loan should of also been prosecuted

    • Javert Chip says:

      Not if you are the wife of a US Senator from Vermont

  4. David Calder says:

    I think once this Bubble Everything pops we’ll learn there was a lot of hidden, off-the-books, debt that was kept from the public and from investors.

  5. Old Engineer says:

    It is amazing to me to learn (mostly through reading Wolfstreet) how much more creativity and innovation is going on around the world in the development of financial shenanigans instead of into new products and technologies.

    • polecat says:

      “creativity & innovation” in this sense = ‘financial alchemy’

    • medial axis says:

      Depends what you mean by new products and technologies. There’s plenty of work and innovation being done, by the young, on new money systems as well as new money. These are decentralised systems which, unlike the centralised systems we have now, cannot easily, if at all, be taken over by the few. Many of our brightest youth are working on plan B. In part because it’s exciting new tech and also because it’s to their benefit (besides the fact the current system is corrupt beyond repair)

      If that’s a bit obscure then it might help if you duckDuckGo “the lightning network”

      • ZeroBrain says:

        Who really runs duck-duck-go? Why should we trust them more than the last guys? Are they really anonymous? The search engines and web services need to be rewritten on a decentralized peer-to-peer platform in a way that *guarantees* privacy as a baseline.

        • medial axis says:

          DuckDuckGo makes some pretty strong promises [1] and breaching those promises would likely be fraud. But you’re right, we don’t know for sure (but do know others do track us and collect info).

          Of course the best (likely the only) way to remain private is to be anonymous and, as you say, use a peer-to-peer network. Such networks are being developed (not just on the net but phone to phone and phone to net etc). Such development is spurred on by the likes of what’s going on in Hong Kong and will be even more so as Western States also try to keep track of what their citizens (oops sorry I mean consumers) are up to. Have I mentioned before that the revolution will not be centralised?

          [1] Such as, it doesn’t send your searches to other sites, by default it does not use any cookies, it does not collect personal information, it does not log your IP address or other information about your computer that may be sent automatically with your searches, it doesn’t store any personal information at all.

  6. Joe Lalonde says:

    Government collusion as well?
    Our Canadian government does many incentives for companies while stepping away from the safety of products…The honor system of big business while many products are outsourced and not checked.

  7. Unamused says:

    Tick tick tick tick . . .

  8. Prairies says:

    Now that you mention the third party intermediary part, I have seen these companies in action. A lot of oil production companies use these firms, every couple years the third party changes names. They pay 7% less than what the supplier submits in exchange for a bill for payment within 30 days instead of 60 days. Complete scam, big suppliers love em but the accounting departments hate them. So much work for less money, they even have the balls to ask for discounts.

    I guess I hated reverse factoring and didn’t even know that was what they called it.

  9. Saltcreep says:

    Perez, please drag that awful Real Madrid monstrosity down with you as you go!

  10. Gorbachev says:

    Why is it only regular folks have to be honest.

    • Rcohn says:

      Today the news indicated a 100b Chinese bank was forced to be absorbed by its larger rivals.
      While much of the pain was felt by US banks in 2008, China has a lack of transparency in its financial reporting . Reverse factoring and other financial games are pandemic in China. The pain in the financial and corporate system is just beginning and will make the situation in the US in 2008 look like a day in the park

  11. Olivier says:

    And what is “normal” factoring?

    • Javert Chip says:

      What it used to be was a straight-forward selling of packages of accounts receivables to a third party for cash.

    • Wolf Richter says:


      “normal” factoring is factoring of “receivables.”

      Receivables are the amounts a company billed to its customers and expects to be paid in due time. They’re an asset (unlike payables, which are a liability, namely money the company owes its suppliers).

      This asset of receivables can be sold. So a company can sell it to a lender at a discount and let the lender collect the money from the customers.

      For example, if you have $100,000 in receivables that your customers owe you, and all of your customers pay on time, you can sell this $100,000 to a specialized lender for maybe $95,000. So you get cash up front and don’t have to wait until the payments arrive; and the lender does all the work of collecting and booking the money.

      This is a very expensive way of speeding up cash flow. Only companies that have trouble borrowing for working capital purposes – such as getting a line of credit – would try factoring. It’s like the last option. These are often small companies with low or no credit ratings.

      A halfway healthy company can normally pledge its receivables as collateral for a credit line at a regular bank, which would be a lot cheaper.

      Regular factoring impacts the asset side of the balance sheet (cash and receivables). It’s perfectly legit and doesn’t hide anything. But it’s expensive.

      Reverse factoring impacts the liability side (a debt) and it mis-classifies an actual loan as a trade payable.

      • Michael Morris says:

        Actually theres another reason a company might use factoring not on your list there Wolf. I had a UK business which was tech marketing B2B, I opened a division in Spain, thankfully in a small way to start, but we found Spanish companies were very late payers, or they simply defaulted on the invoice, and I looked at factoring because I wasn’t going to pour any more money into this venture, so the idea was we’d get 80% of the invoice paid up front. However it still didn’t work out because the margin the Factoring company wanted was simply ridiculous, so we packed it in.

      • Olivier says:

        Thanks for this explanation. So a normal factor is a kind of debt collector, right? Except the debt to collect hasn’t gone bad yet.

        There was once an occupation known as credit card factoring. It played an important role in the early days of internet shopping. Was it the same kind of factoring?

      • char says:

        I think that my dentist does this. I assume not because of money issues but because it creates much less trouble/work. Would not be surprised if factoring is more profitable than doing it yourself if you have a lot of small bills

  12. Jack says:

    Great article Nick , keep them coming,

    The state governments of both major population centers in Australia have ran very shabby Economies for the last 20 odd years.

    The major infrastructure projects that total around 100 billion dollars between the two states ( in the pipeline) promises dangled in front of voters in the last elections will have ( VERY DIRE IMPLICATIONS) for the citizens of these two states.

    In summary these two states will need an urgent bailout as soon as next year .

    The amounts of overpriced projects that are allotted to both ( tired local and international Construction outfits) will see these projects come a cropper as signs are already there with snail paced progress and under delivery of promised results.

    This has been the case under both colors of governments . No one is innocent here!

    The problems with these imported models of projects delivery doesn’t lie exclusively with the financial soundness of the company that are contracted to do the work , it lies in the imported models that they rely on, the so called PPP( public private partnerships) these have proved to be anything but!

    They in general end badly with the tax payer carrying the can at the end !!

    This off course doesn’t apply to Australia alone it’s rampant in the Uk , Canada and US , the amount of corruption is beguiling indeed.

    There is s school of thought that perceive of looting the public purse is only justified to keep the fictitious Economy moving along.

    But Nick’s article above proves otherwise, it’s only a matter of time that houses built on sand do collapse.


    • polecat says:

      Question : Could this .. uh .. kerfuffle be enough to bring down the current Australian Government ??

      • Joe says:

        The current government system allows parties to choose who you get to choose to vote for.
        For Decades the politicians chose their own cause of laws and policies that didn’t include your choice.
        It is imposed and made into laws so that you cannot object without a penalty, whether it is fines or jail.

      • Jack says:


        Would it matter to you?!

        The Pyre of Financial mismanagement is “ Tinder dry, and well set”!

        You know the one you’ve talked about in one of your earlier comments above.

        So there will be “ fireworks “ to watch,

        The problem is the spectators will be
        “ very few “ as the Scoundrels who brought us to this moment have lost the wafer thin buffer that to a certain extent protected the economy from deep shocks ( the budget surplus earners slowly from royalties on mining ,land stamp duty , gambling , alcohol and tobacco taxes)

        collected over the previous 30 years!

        Now that everyone has being “ fully undressed “! Our goose is well and truly cooked!!

        So the answer to your question will be
        , it doesn’t matter who flip the switch to the on position … the show will happen,

        pray that ( all good cats like yourself are amongst the spectators)! :)


  13. NoGain says:

    This kinda sums up the bottom line for playing accounting games and finding new clever ways to manage liquidity risk:

    “… The most important reason for their argument is that the moment these (SCF and RF) programs are terminated, the company’s liquidity position will be impacted and the company will most likely need to replace the off-balance sheet funding with an alternative source of funding, which the agencies unconditionally assume to be on-balance sheet unless the company can and would want to proof differently, which is a difficult task.

  14. John says:

    Thanks Nick

  15. While still a neophyte I read Barron’s red book on Financial Reports, and I tried to use that information for an investment tool. Does anyone still do that? This is a short sellers mana.

  16. Wisdom Seeker says:

    Typo and/or Math Error –

    Article says “ACS said in its interim results released on Monday that its total factoring bill was running at €2.3 billion ($3.7 billion) at the end of June.”

    Exchange rates say 2.3 billion euros is worth more like $2.7 billion, not $3.7 billion.

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