EuroFinance

Pandemic-related lockdowns have slowed manufacturing and sales at large multinational companies, putting pressure on their smaller suppliers that have limited working capital requirements and irregular cash flows. This has boosted Supply Chain Finance (SCF), which allows multinationals to support suppliers by providing them with early payment from their partner banks at a discounted rate.

In a tell-tale sign of increased SCF use, Days Payable Outstanding (DPO) increased dramatically at US manufacturers last year, according to EuroFinance analysis of third-quarter filings. In a sign of the political importance of helping suppliers, the US government guaranteed over $1 billion of receivables from troubled aircraft manufacturer Boeing.

But regulators are also demanding more disclosure. In April last year the US Securities Exchange Commission (SEC) wrote to beverage giant Coca-Cola, Boeing and to other prominent companies to disclosure more on their supply chain finance programmes.

In June, Coca-Cola replied to the SEC that it had started the SCF programme banks in 2014. It also said that the company did not disclose the size of its SCF program as it did not had “materially affected” Coca-Cola’s liquidity and will not likely affect their liquidity in future. It also indicated that “approximately 21 per cent of outstanding accounts payable balance as of December 31, 2019, and March 27, 2020, was sold by suppliers to the financial institutions as a result of the SCF program”.

Since then, company has seen a significant increase in DPO, which indicates the average time it takes for the company to pay its suppliers. Coca-Cola’s DPO in 2018 stood at 67 days which jumped to 79 days in 2019 and 112 days by 30 September 2020. Its accounts payable increased from $2.7 billion in 2018 to $3.8 billion in 2019 and $4.2 billion at the end of Q3 2020.

Meanwhile Coca-Cola’s arch-rival PepsiCo also saw a jump in DPO. It went up from 90 days in 2019 to 103 days in 2020.

Among industrial companies, Boeing, 3M and Honeywell also saw a jump in their respective DPO with Boeing’s increase of 15 days being the largest. Meanwhile Lockheed Martin’s DPO dipped from 13 days in 2019 to 9 days in September 2020.

“We have made enhancements of our supply chain risk assessments and are closely monitoring each supplier, mitigating issues, exploring financing solutions and getting creative and supporting them in the best way we can”, said Gregory Smith – CFO & EVP, Enterprise Operations at Boeing.

The plane maker had limited capacity to draw on bank lenders as it was already financially constrained as a result of the troubled 737 MAX aircraft. In November 2020 Boeing received a US-government-backed EXIM guarantee wherein Citibank would finance up to $500 million accounts receivable due from Boeing company to its US-based suppliers for the term of 12 months. In July 2020, EXIM provided a guarantee of $510 million for French bank Credit Agricole to purchase accounts receivable from Boeing suppliers CFM International and General Electric.

The SEC in November issued a rule in which it adopted amendments to Regulation S-K, relating to business disclosure. In that document, it noted that “if supply chain finance arrangements used by a registrant are a significant part of its working capital practices, they may be material to understanding the nature of its commercial relationships. While MD&A disclosures on the topic are more focused on the potential material impact of such arrangements on the registrant’s periodic cash flows and financial condition, the proposed principles-based approach would call for additional disclosure if material to an understanding of those commercial relationships”.

Echoing the SEC, the US Financial Accounting Standards Board noted in its October 2020 board meeting that it has “advocated for increased disclosure of qualitative and quantitative information about those (SCF) programs”.

The credit rating agency S&P Global Rating has called SCF as ‘sleeping risk’ and saying this form of ‘poor disclosures can obscure a company’s underlying health and result in the mispricing of risk or misallocation of capital’.