The Standard Definitions for Techniques for Supply Chain Finance, explain what we actually do and they contribute to the discussion on accounting
Christian Hausherr, Product Manager Supply Chain Finance EMEA, Detsche Bank, Chair, Global Supply Chain Finance Forum
So it was particularly helpful to hear from Frédéric Gits, Group Credit Office, Corporates at FitchRatings at the 2020 event. He confirmed that from the agency’s perspective, trade payables that are extended beyond what is considered normal in the industry (for example 60 days) with the help of an intermediary financial institution would be classified as bank financing. He gave the following example:
- Assume an outstanding amount of confirmed €100m in trade payables
- There is an extension of these trade payables from 60 days to 180 days
Fitch would consider that the 120 days extension is akin to financial debt and would add to financial debt 120/180 of the outstanding amount, i.e. €67m. Cash flow impact of a year- on-year change in reverse factoring balance would also be adjusted for.
This treatment, said Gits, reflects the uncommitted nature of these facilities and “the likelihood that in financial distress they will become unavailable, requiring alternative funding to be found”. Taking this approach, he added, “improves comparability between issuers engaging in reverse factoring and those not doing it”.
Unsurprisingly this prompted extended and robust discussion among delegates. While they understood the need for transparency, several felt this automatic reclassification to bank debt once the payables went past 60 days was missing the granularity and dynamics of the payables finance product. “Payment terms are extended because the financing is more attractive to the seller,” said one bank delegate.
But as Bugeja summed up, if a payables finance programme is all fully disclosed as a means of supporting suppliers upfront, there should be no concern. If, however, the motivation is to extend terms beyond what is reasonable for the industry, corporates “deserve all they get”. He pointed out that ratings agencies are there for the benefit of investors and lenders.
Bugeja added that the group that rarely reads ratings reports - and trust a big name corporate - are the suppliers who are particularly vulnerable if, having agreed longer payment terms, they are dependent on a source of finance they would not otherwise have had access to. “If the banks pull the plug because they can see a Carillion situation unfolding, suddenly those suppliers have work in the pipeline they will not get paid for as these are not committed lines. So they then have a whole load of pre-shipment risk − and stock that is now going to be a load of unsold stock − on their balance sheet because the company has gone bust.”
While it is not helpful for the pendulum to swing too far, the way to combat surprise reclassifications into bank debt by ratings agencies is to be very transparent so they can make sensible judgements, he concluded.
Deutsche Bank’s Christian Hausherr (Product Manager, Supply Chain Finance EMEA), who also chairs the Global Supply Chain Finance Forum, pointed out in a later panel why the Standard Definitions for Techniques for Supply Chain Finance were such an achievement for the industry. “These help anyone who is interested in this business, whether it be a regulator, analyst, accountant or corporate, explain what we actually do and they contribute to the discussion on accounting – which while a hot topic that has escalated recently, has actually been an issue for the past 15 years.”