Fresh disclosures of supply chain finance (SCF) arrangements suggest some US companies are stretching payment terms “later and later”, Moody’s has warned, heightening risks to investors if a financing programme is withdrawn.
Since late 2023 companies have been required to add “roll forward” data to their disclosures of supplier finance arrangements in financial statements, designed to reveal the amount of obligations outstanding.
Forty-seven of 121 companies sampled by Moody’s that use SCF to pay suppliers take more than an average of 90 days to pay back the financing entity, according to a September 9 analysis by the ratings agency. Moody’s views 90 days as a “reasonable upper limit” for classifying such an exposure as a trade payable.
Companies benefit from classifying amounts owed under SCF facilities as trade payables because it reduces the debt on their balance sheet and improves debt-to-equity ratios.
The issue has long been a source of tension between companies who use SCF and ratings agencies, who have argued that amounts owed to financial institutions under the programmes can be equivalent to hidden debt when they are not repaid within around 90 days.
“These dates are actively being pushed later than what we consider reasonable (among US corporates) to settle an item classified as trade payable,” Moody’s says in the paper. “Extensive use of supplier finance poses a risk to a company’s liquidity. Should a programme’s financial sponsor withdraw or curtail it, the programme can unwind rapidly, putting stress on liquidity.”
Most US public companies say that the due dates given to their SCF providers match the due dates on invoices issued by their suppliers.
That suggests that suppliers are willing to extend payment terms longer because they are getting paid immediately by the buyer’s financial intermediary, says Moody’s Ratings’ David Gonzales.
“I can’t imagine those are independent variables: That the supplier is able to get paid from a finance institution whenever they want, and thus, the invoice dates that they’re putting on their invoice can get later and later,” Gonzales, a senior accounting analyst, tells GTR.
Moody’s says when it rates companies it does not automatically adjust payables to debt if a payable exceeds 90 days, but instead makes adjustments on a case-by-case basis, partly because normal payment terms vary between sectors.
S&P Global Ratings, however, treats trade payables that remain outstanding after 90 days under a supplier finance arrangement as a form of borrowing.
The agency said in March that its previous sector-by-sector approach had been undermined because the existence of supplier finance arrangements has lengthened what are considered “customary” payment terms.
“A customer might have persuaded a supplier to change the contractual payment terms from 90 to 180 days,” S&P said in an analyst note. “From the supplier’s perspective, they could be paid on day one by the intermediary because of the supplier finance.
“However, the change in contractual terms allowed the customer to claim that they were still settling their invoices – now paid to the intermediary – within a ‘normal operating cycle’, albeit a new normal that they created on the back of supplier finance.”
Since the end of 2022, US companies using SCF to pay suppliers have been required to disclose many elements of their programmes, following changes made to accounting standards that were largely driven by ratings agencies.
Disclosure of supplier finance arrangements has been helpful not only to investors but also banks that can see if a corporate also has facilities provided by other financiers, says John Monaghan, a former head of SCF for Citi.
But he says that further disclosures to specify the days outstanding under SCF programmes – as has been called for by ratings agencies – may go “too into the weeds”.
“I think it’s done what it was supposed to do,” says Monaghan, now chief innovation officer of software provider Premium Technologies, referring to the disclosure requirements. “An investor now also has visibility on looking at a publicly reported balance sheet or financials, and they can make their decisions as well.”
Renewed attention on accounting rules
Companies’ disclosure of how they finance their supply chains has been thrust back into the spotlight in recent years due to reported concerns over the use of factoring by US auto parts supplier First Brands Group.
US media outlets reported earlier this week that the privately held company may have to seek bankruptcy protection after debt traders grew skittish about the deterioration of its finances and investors baulked at its attempt to refinance around US$6bn in debt.
Much of the investors’ concern, according to sources cited by Bloomberg, is based on the company’s use of factoring to generate cash flow. The Financial Times reported on September 24 that First Brands’ off-balance sheet funding could exceed US$4bn.
In March S&P called for further improvements to the disclosure rules to better capture suppliers that are using supplier finance to bring forward payments from buyers.
Companies active in car parts retailing and distribution in the US are heavy users of SCF as both buyers and suppliers.
Disclosures made since US accounting standards were changed have consistently shown that auto parts retailers are some of the biggest users of buyer-led SCF due to their need to hold large volumes of inventory.
Just four such companies disclosed US$16.4bn in supplier finance facilities at the end of their last financial year, according to Moody’s, representing just over half of the entire SCF balances outstanding for more than 90 days in the agency’s sample.
Moody’s analysis suggests average days outstanding under the four firms’ programmes far exceeds 90 days, with Advance Auto Parts having over 350 days outstanding and O’Reilly Automotive Inc just over 300 days.
Neither firm responded to requests for comment.
