EuroFinance

Supply Chain Finance (SCF), also known as reverse factoring, allows purchasers to greatly extend payment periods and reap working capital benefits by bringing in banks to pay suppliers quickly and to accept payment from the purchaser at a later date. For years SCF has been promoted as a win-win product for purchasers and suppliers.

However, for over-leveraged companies, SCF can worsen problems if banks pull funding, creating a liquidity spiral. That contributed to the collapse of UK services company Carillion in 2018 and more recently a liquidity crunch at Spanish supermarket chain DIA, which narrowly avoided filing for bankruptcy in May 2019.

Following the lead of Fitch last year, rating agency Moody’s issued a warning in September on the liquidity risk of supply chain finance, increasing the focus on debt-laded companies that have grown dependent on the practice.

Speaking at the EuroFinance International Treasury event in Copenhagen, Fernando Diaz, head of payment services and SCF at BBVA echoed Moody’s warnings and called for banks and platform providers to do more. “These cases happened because the companies were abusing SCF. They went too far. It should be possible to define among the different stakeholders mechanisms that could help anticipate these situations.”

In its report, Moody’s complained that disclosure of SCF was “very poor”, and some SCF funders agree. “It’s very difficult to know what’s happening when companies are leveraging too much with SCF” Diaz said. “That’s why disclosure and transparency is the right thing to do.”

Telecommunications conglomerate Liberty Global is one company that has opted for SCF transparency, classifying its $4 billion SCF programme as debt for accounting purposes. Director of vendor finance Razvan Coarca told Copenhagen delegates. “I think transparency is the key. Once you show what level of support you have from funders then people can make their own informed decision as funders or investors. Without transparency, you get to a point where things could get out of hand.”

Such transparency may be necessary for Liberty Global because as a B-rated company it is particularly dependent on lenders to maintain access to funding. However, investment grade companies see no downside in keeping investors in the dark over their use of SCF.

Witness brewing giant AB InBev, whose days payable outstanding (DPO) of 261 days is one of the highest in its sector. If that had been achieved by using SCF to extend payment terms beyond a 40 day baseline, it would equate to an obligation to partner banks of $12 billion. However, AB Inbev discloses nothing on how it achieves such extended payment terms, and declined to respond to questions from EuroFinance.

Last October, Moody’s and other rating agencies downgraded the company to two levels above junk because of high debt and worsening cash flows. While the September Moody’s report doesn’t mention the company by name, it raises the question of whether a change in rating policy could make SCF a factor in future AB Inbev rating decisions. In the first half of 2019, AB InBev reported a $1 billion decline in accounts payable. Although this may be a seasonal effect, it is also consistent with a reduction in SCF obligations.

Linda Montag, senior vice president at Moody’s responsible for rating the company, says that so far working capital management has not played a role in her decision making.

“As far as we are aware, AB Inbev does not have a reverse factoring program or engage in supply chain financing”, she said. “We believe that their negative core working capital has been created by managing relationships with suppliers and customers for many years.”