~Santander

Patricia Halliday Chief Risk Officer

Rt Hon Frank Field MP and Rachel Reeves MP Chairs Work and Pensions Select Committee and Business Enterprise and Industrial Strategy Select Committee Committee Office

Sth February 2018

Dear Chairs

I refer to your letter of 30 January 2018 regarding Santanders early payment facil ity programme

with Carillion and its suppliers Our Chairman has asked that I respond as I am the Santander UK Chief

Risk Officer and the Santander exposure to Carillion was managed within my division from July 2017

I welcome the opportunity to clari fy Santanders position in relation to this programme

1 What was the nature of the early payment facility (EPF between Santander and Carillion

The EPF was an uncommitted faci lity constituted by a programme involving Santander Carillion and

participating Cari llion suppliers for the payment or discounting of Carill ion invoices The EPF

programme between Santander and Carilli on had been in place since 2014 Santander was one of

several banks that provided types of EPF programmes to Carillion and its suppliers

The programme had two elements

(a) A payment services agreement between Carillion and Santander that outlined the terms on which Santander would either

(i) subject to Carillion providing sufficient funds for Santander to make the relevant

payment pay confirmed invoices to suppliers on the due date (the remittance service)

or

(ii at Santanders discretion buy confirmed invoices from suppliers at a discount (the

discounting service)

Confirmed invoices were invoices notified by Carillion to Santander as eligible for payment

under the programme

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(b) Supplier agreements between Santander and each Carillion supplier participating in t he

programme

Under the supplier agreement a supplier could choose to sell all of its confirmed invoices to

Santander at a discount (the auto-discounting service) or to offer to sell to Santander at a

discount specific confirmed invoices at any point up unt il 3 days before t he due date of the

invoice (the ad hoe discounting service) If a confirmed invoice had not been discounted prior

to its due date it would be paid subject to the terms of the remittance service

A supplier agreement could be terminated at any time with immediate effect by Santander

giving written notice to the relevant supplier

The programme principally operated through an internet based portal operated by Santander

Carillion periodically provided batches of confirmed invoices to Santander to load into the system

Once in the system confirmed invoices subject to the auto-discount ing se rvice would be processed

for payment and suppliers using the ad hoe discounting service could choose to nominate a confi rmed

invoice for discounting Notwithstanding Carillions deteriorating credit position the discount ra te

that Santander applied to invoices accepted under the discounting service remained constant

throughout 2017 and up to 15 January 2018

2 If this was in effect a credit facility for Carillion how much did the Company borrow from

Santander in 2016

The programme operated on an uncommitted basis Carillion suppliers granted Carillion credit when

agreeing the payment terms of their invoices with Carillion The programme allowed suppliers to opt

to rece ive discounted early payment from Santander of the amount due to them with Sa ntander

assuming the Carillion credit risk for the relevant invoice until the invoice payment date

In 2016 Santanders exposure to Carillion under the programme averaged pound109m

3 How many of Carillions suppliers did Santander provide the EPF to

During the course of 2017 c270 Carillion suppliers were actively participating in the programme of

which 109 were using the auto-discounting service

4 What led Santander to terminate the facility in December 2017

Following Carillions profit warning on 10 July 2017 and the departu re of the previous CEO Santander

worked with Carillion and the other lead banks to the Company in an attempt to restructure Carillions

financial position This work included the provision by Santander on 24 October 2017 of addit ional

committed new money fa cilities of pound28 million as part of a total new money package of pound140 million

These new money facilities were part of a package designed as a bridge to Caril lion completing certain

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(b) Supplier agreements between Santander and each Carillion supplier participating in t he

programme

Under the supplier agreement a supplier could choose to sell all of its confirmed invoices to

Santander at a discount (the auto-discounting service) or to offer to sell to Santander at a

discount specific confirmed invoices at any point up unt il 3 days before t he due date of the

invoice (the ad hoe discounting service) If a confirmed invoice had not been discounted prior

to its due date it would be paid subject to the terms of the remittance service

A supplier agreement could be terminated at any time with immediate effect by Santander

giving written notice to the relevant supplier

The programme principally operated through an internet based portal operated by Santander

Carillion periodically provided batches of confirmed invoices to Santander to load into the system

Once in the system confirmed invoices subject to the auto-discount ing se rvice would be processed

for payment and suppliers using the ad hoe discounting service could choose to nominate a confi rmed

invoice for discounting Notwithstanding Carillions deteriorating credit position the discount ra te

that Santander applied to invoices accepted under the discounting service remained constant

throughout 2017 and up to 15 January 2018

2 If this was in effect a credit facility for Carillion how much did the Company borrow from

Santander in 2016

The programme operated on an uncommitted basis Carillion suppliers granted Carillion credit when

agreeing the payment terms of their invoices with Carillion The programme allowed suppliers to opt

to rece ive discounted early payment from Santander of the amount due to them with Sa ntander

assuming the Carillion credit risk for the relevant invoice until the invoice payment date

In 2016 Santanders exposure to Carillion under the programme averaged pound109m

3 How many of Carillions suppliers did Santander provide the EPF to

During the course of 2017 c270 Carillion suppliers were actively participating in the programme of

which 109 were using the auto-discounting service

4 What led Santander to terminate the facility in December 2017

Following Carillions profit warning on 10 July 2017 and the departu re of the previous CEO Santander

worked with Carillion and the other lead banks to the Company in an attempt to restructure Carillions

financial position This work included the provision by Santander on 24 October 2017 of addit ional

committed new money fa cilities of pound28 million as part of a total new money package of pound140 million

These new money facilities were part of a package designed as a bridge to Caril lion completing certain

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disposals Despite the provision of th ese new money commitments and continued close engagement

with Carillion into December the envisaged disposa ls did not take place and the detailed business and

restructuring plans originally expected to be received by 8 December 2017 were furt her delayed This

series of events combined with updated financial analysis provided by Carillion to t he banks advisors

in the second week of December further undermined Santanders confidence in Carillions financial

position In light of the lack of progress with the restructuring plan Santander took t he decision to

terminate the auto-discounting facility as a prudent risk management measure but to keep the ad

hoe discounting service available to suppliers

Santander served notice on 21 December 2017 to terminate the auto-discounting service for all

suppliers At that time 80 of these suppliers had live confirmed invoices in the system all of which were

purchased on a discounted basis and paid by Santander In the notice given to terminate the relevant

supplier agreements with suppliers who had been using the auto-discounting service suppliers were

advised that notwithstanding this notice they could still nominate confirmed invoices fo r ea rly

payment using the ad hoe discounting service This change meant t hat all Carillion suppliers would

participate in the programme on the same terms ie ad hoe discounting service only

5 What was the nature of the urgent discussions with Carillon and why did Santander then

decide to continue the facility albeit on revised terms

As noted above Santander and Carillions other lenders had been in discussions since Ju ly 2017

Further discussions involving Santander Carillion advisers and other lead ing banks took place over

the period from 22 Decem ber 2017 to 27 December 2017 These discussions were not limited to

Santanders actions in relation to the EPF programme but also included di scussions on Carillions cash

position and funding needs and restructuring proposals

Santander confirmed to Carilli on on 23 December 2017 that it was prepared to continue to discount

invoices under the ad hoe discounting service up to an aggregate amount of its then exposure to

Carillion under the programme of cpound101m Santander was requested by Cari llion to increase this

exposure to Carillions forecast maximum utilisation by suppliers during January of pound117m in order to

give Ca rillion and its advisers more t ime to develop its revised business plan and financial restructu ring

proposals for consideration by all stakeholders After consultation with Carillion and the other leading

banks and as part of continuing to work constructively on the restructu ring plans Santander agreed

on 24 December 2017 that it would continue to offer the ad hoe discounting service on an

uncommitted basis and increase its exposure in line with Carillions request up to an aggregate amount

of pound117m The terms of the discount rate Santander applied to the ad hoe discounting service were

not revised and remained const ant through to 15 January 2018

A further communication was sent to Carillion suppliers on 27 December 2017 re-confirming that the

ad hoe discounting service remained in place In the period following th is communication to 15

January 2018 suppliers received from Santander a total of pound14m of payment s in relation to discounted

invo ices and a total of pound06m in payments of invoices on their due date under t he remittance service

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6 Does Carillion currently owe any money to Santander as a result of the EPF

Santanders outstanding exposure to Carillion in relation to the invoices purchased from suppliers

under the programme is pound91 million (including the pound14m referred to in the answer to question 5

above) In light of Carillions liquidation Santander has taken a bad debt provision fo r substantially all

of this amount The EPF exposure is separate from Santanders committed exposures to Ca rillion

(including the new money facilities referenced at 4 above) for which we have taken significant

additional bad debt provisions

7 Can you send us a copy of the email to suppliers referred to in the statement above

We append the text of the notice of termination sent on 21 December 2018 to the 109 suppliers using

the auto-discounting service

Of the suppliers who responded to the notice terminating the auto-discounting service of 21

December 2017 we are only aware of one supplier who subsequently received an inaccurate response

from our customer service centre The response from Santander customer service centre was sent on

22 December 2017 stating that In this moment all the payments with Carillion are stopped This

was a mistake and was corrected on 27 December 2017 All of the invoices presented by this supplier

prior to 15 January 2018 were accepted and paid by Santander The substance of the email is

contained above but as this was an email communication between Santander and a single supplier

we do not fee l it is appropriate to share this correspondence without express approval from t he

supplier in question

I hope that the information provided in this letter is useful but please do not hesitate t o get in touch

should you need any further detail

Yours sincerely

Patricia Halliday

Chief Risk Officer Santander UK pie

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Appendix

Auto-Discounting Termination Notice Text

Dear Sirs

Termination Letter in respect of the supplier agreement between Santander Factoring y Confirming SA EFC and [insert the name of the supplier] dated [insert date of the agreement] (the Agreement

We refer to the Agreement Term s defined in the Agreement have where the context permits and unless otherwise defin ed herein the same mea ning when used in th is Let ter

We would like to notify you that Santanders operational model has changed and we are no longer able to offer the automatic payment solution in relation to all present and fut ure invoices

This Letter therefore serves as formal written notice of termination of t he Agreement pursuant t o condition 9 of the Agreement effective as of the dat e of this Letter

We may continue to offer you early payment of your invoices at our discretion which can be request ed via our on line portal or by sending us a new signed copy of t he supplier agreement w hich we will send to you separately by email In clause 5 of t he supplier agreement please select the option entitled Invoices specified at Clause 411

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This Letter (including any non-contractual obligations or liabiliti es arising out of it or in connect ion with it is governed by and shall be construed in accordance with English law

Yours fa ithfully

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