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

PHOTO: Bloomberg

This ‘crack cocaine for CFOs’ was also extensively used by Carillion until it collapsed.

By Nick Corbishley | 9 August 2019

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. […]

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