Newly mandated disclosures about certain types of supply chain finance programmes have prompted the revelation of some hefty deals at major US firms, so far totalling a collective US$85bn. But as Jacob Atkins reports, analysts and investors are largely unhappy at how far the reporting requirements go, making another debate over the extent of the rules almost a certainty.
Supply chain finance (SCF) disclosure rules are now in force in the US, after years of wrangling over their scope.
But already, the rating agencies that pushed for them in the first place say they don’t go far enough and that investors are still largely in the dark about the risks programmes can pose to buyers.
“The information is fairly basic; it’s really hard to… get something valuable out of it,” says senior accounting analyst at Moody’s Investor Services David Gonzales, who has extensive experience interrogating the books of firms that use SCF.
The reporting requirements laid out by the Financial Accounting Standards Board (FASB) fall on the shoulders of buyers, who use banks or specialist providers to arrange payables finance programmes through which their suppliers receive early payment in exchange for a discount.
The new rules kicked in from Q1 this year, so far prompting 190 companies from a variety of industries to explicitly reveal the existence of their programmes for the first time.
But rating agencies, whose job is to parse companies’ financial statements to assess their health and creditworthiness, argue that beyond the mere existence of a payables finance facility, there is precious little information to be gleaned from the disclosures.
“I think it’s a step in the right direction, but more work is needed,” says Shripad Joshi, a senior director and accounting officer at S&P Global Ratings.
Programmes revealed
While a handful of companies had already disclosed some details about supplier finance programmes in previous filings, most began reporting for the first time this year. In Q1, 134 US corporates revealed a collective outstanding balance of US$85bn, according to a July 24 analysis by S&P Global Ratings.
That figure represents around 4.5% of all reported debt. But for some companies, the size of their outstanding SCF balances was more than 100% of their stated debt obligations.
Joshi says he was surprised to find SCF deals “present in a much broader range of sectors than initially suspected, including metals and mining, forest products, packaging and chemicals”.
“When you put it all together and view it, there are other sectors which come to light and some of the companies in those sectors have some significant balances in terms of supply chain finance,” he says. “That was definitely noteworthy.”
Altice, Kaiser Aluminum, Krispy Kreme and Lululemon were among the listed companies to include details of programmes in Securities and Exchange Commission filings, according to data provided to GTR by BedrockAI, an investment research software company.
The size of programmes and payment terms vary widely. More than 20 companies, including O’Reilly Automotive, General Electric, Boeing and Coca-Cola, divulged outstanding supplier finance amounts of over US$1bn, according to S&P’s analysis.
But US telco AT&T led the pack, with its outstanding balance of US$12.69bn almost triple the second-largest amount of US$4.7bn disclosed by Walmart. AT&T said in its filing it has three supplier finance programmes, including some US$5bn owed under what AT&T terms “vendor financing” arrangements, which do not involve a third-party financial institution. The SCF amounts are still a small portion of its overall debt pile of US$130bn.
S&P says that of the 134 companies with outstanding balances, almost half did not provide any details of payment timing. Many others said they are not required to repay their bank or supplier finance provider for up to a year, well beyond the 90 days that the agency defines as the line between a payable and a debt.
NextEra Energy and Genuine Parts, for example, gave their repayment ranges as 30 to 365 days and TTM Technology said it took an average of 290 days to repay its SCF provider. Boeing and Warner Bros. Discovery were among companies giving only maximum repayment terms of up to a year.
“That’s not very helpful,” Joshi tells GTR. “I think the payment terms can certainly be a lot more specific.”
Lance Doherty of Pacific Life Insurance, which invests in SCF, told Bloomberg Tax in May that the disclosures so far are “inadequate” and “difficult to understand”.
When a programme is pulled
Before the FASB rules came into force, Moody’s Gonzales says he would have to contact individual companies to first ascertain whether a payables finance arrangement – also known as reverse factoring and supplier finance – was in place, and then seek further details about it.
Now that disclosure is mandatory (if the company deems the programme to be material), the first step is taken care of, but he says the paucity of details in the filings means bespoke research is still required.
“We do think [SCF programmes] can provide value and in this environment seem to be a cheap way to get some capital for your company,” he says. “But we want to understand the risks that are associated with that.”
One of the top hypothetical scenarios that unnerves analysts is a decision by an SCF provider to suddenly withdraw from a programme, or a provider going bust.
While many SCF facilities are provided by large banks with healthy balance sheets, the demise of Silicon Valley Bank and First Republic Bank earlier this year was a reminder that lenders are not infallible. The collapse of high-profile SCF provider Greensill in 2021 is another obvious example, and one that fuelled demands for companies to disclose their relationships with such financial firms. A deterioration in a buyer’s credit profile could also prompt an SCF provider to axe or curtail a programme.
If their bank pulls the plug, a buyer is left facing payments for invoices under normal payment terms rather than the extended terms it enjoyed through the SCF programme. Depending on the size of its financing arrangements, those invoices could represent a hefty and sudden liability.
“If it goes away, there’s going to be a hole in operating cash flow for a certain period of time – does the company have enough liquidity to get through that period?” asks Gonzales. “That’s our key concern as these things are being leaned on more and more heavily.”
“If [companies] have adequate liquidity to get through it if it gets pulled, then this isn’t a huge concern and it’s really just a way for them to save money. But we need to evaluate both sides of that coin to make sure that they aren’t… relying on anything, and we need to monitor it over time. It’s going to be a constant effort.”
But Enrique Jimenez, chief product officer for SCF provider Demica, says the requirement to report quarterly means the window for exposures not captured in the financial statements will be fairly narrow.
“Considering payment terms are in the average of 30 to 60 days in general, a programme ended prematurely may only have between 30 and 60 days of undisclosed information out of the year, which, if [there are] no material changes in the funding lines, shouldn’t represent a major distortion in the evaluation of a company’s balance sheet health,” he tells GTR.
The FASB changes, he adds, “should represent a big step in the right direction to improve transparency for the analysts and agencies to assess the health of a company’s balance sheet in terms of payment obligations”.
Another showdown?
Rating agencies’ disappointment with the quality of the disclosures has set the scene for a repeat of the debate that ran from 2019 to 2022 over the level of detail the accounting standards should require. While supplier finance providers largely accepted the need for specific disclosure requirements, they – along with some large corporates – argued then that some aspects of a detailed disclosure regime would be unfairly onerous on firms.
From next year, the much larger number of companies using the primary non-US accounting method, the International Financial Reporting Standards (IFRS), will also face new reporting rules.
Crucially, these also demand that companies state the total value of invoices that have been paid by the SCF provider but remain unpaid by the buyer. This requirement should mean that rating agencies will rarely need to do further research on companies to satisfy their questions about the risks posed by programmes, according to Gonzales.
It seems likely that the FASB will face calls to adjust its standards to include the IFRS requirement.
The FASB automatically conducts post-implementation monitoring of new standards, which includes reviewing financial statements and surveying accountants. This is followed by monitoring the application of the standards and benefits to investors and other consumers of financial statements, culminating in a report.
Such a review can result in further amendments to address unintended consequences or costs, or aspects of standards that are not being understood. Interested parties are also free to lobby the FASB for changes. Indeed, the genesis of the current disclosure rules was a push by big accounting and auditing firms.
Joshi says: “I think from a user or investor perspective, more standardisation or more consistency in those disclosures, especially the payment terms, is critical. Hopefully, that can be tweaked and worked through.”
But he adds that S&P will wait until a wave of annual reports is filed early next year before making any representations to the FASB.
Meanwhile, the numerous companies that use IFRS are preparing for a slightly different disclosure regime from next year.
The industry appears to be taking the reforms in its stride, with a recent survey of industry professionals by Demica finding that the vast majority don’t expect the IASB reforms to affect programmes, with just 5% saying the requirements are a challenge to transactions.
Around half of the survey’s respondents said they don’t expect deeper disclosure requirements to dent demand. “We expect this figure to increase as transparency becomes a norm that will benefit the whole industry,” says Jimenez.
Some big corporates in Europe were already disclosing programmes to some extent, he adds, and “industry leaders I speak to agree that improving transparency is beneficial for all parties, to defend practitioners from criticisms from those not familiar with these tools”.
Kevin Boynton, Standard Chartered’s head of trade sales, told the GTR UK event in June that the bank is “still getting programmes over the line” despite the tougher reporting requirements. “The accounting treatment is left to the buyer to manage but we have ways of structuring to help them with that,” he said. “I see this is more of a challenge coming up, but not a challenge that is going to prevent us from proceeding.”
What the FASB requires to be disclosed:
- The key terms of the programme, including a description of the payment terms (including payment timing and basis for its determination) and assets pledged as security or other forms of guarantees provided for the committed payment to the finance provider or intermediary.
- For the obligations that the buyer has confirmed as valid to the finance provider or intermediary:
- The amount outstanding that remains unpaid by the buyer as of the end of the annual period (the outstanding confirmed amount)
- A description of where those obligations are presented in the balance sheet
- A rollforward of those obligations during the annual period, including the amount of obligations confirmed and the amount of obligations subsequently paid.
