Fitch Ratings published a report earlier this year which caused some controversy among supply chain finance professionals. Written after the collapse of UK construction firm Carillion, which had a considerable reliance on SCF, the report was entitled “Hidden debt loophole could be widespread”. At the SCF Forum Europe in Amsterdam, SCF Briefing editor Andrew Sawers interviewed report co-author Alex Griffiths, head of EMEA corporate ratings at Fitch and started by asking, “Why did you call it a loophole?”
Companies use perfectly legal accounting practices to, within the rules, change how their accounts look, Griffiths replied. SCF is “a loophole which is allowed” but most investment analysts have too many companies to analyse to be able to discover whether SCF is being used.
“Using that language was to make the point that, at the moment, it simply isn’t transparent,” he said. “You can’t tell who has and who hasn’t got SCF.”
He said that he regards SCF as being inherently “marginally positive” because it’s an additional source of finance. But the problem is that “we simply don’t know what’s going on”, he said. “You can tell that creditor days have gone up, but other than that you really can’t tell what’s happened.”
Carillion, he said, was using SCF “purely as an alternative source of borrowing”. The real danger, he said, is that SCF is not committed. With other debt, as long as a borrower keeps to its covenants, the bank won’t pull the finance.
“When things start getting bad, the whole working capital thing just goes horrible. People don’t want to give you any sort of terms,” Griffiths said. “Worse, the supply chain itself has got so used to borrowing on these terms, so it’s not just your problem, it’s their problem too. “
One Forum delegate commented that even too much water will kill you, but without it, you die.
Griffiths replied, “Nobody is breaking any rules – but some people have pushed those rules to the absolute limit and for the rest of companies that are using SCF sensibly and having just the right number of eight glasses a day, we have no way of knowing whether it’s eight glasses a day, a drop or a bathtub.”
ESMA, the European Securities and Markets Authority, has suggested that SCF should be disclosed. “There needs to be the intent to help the user [of accounts] understand,” Griffiths said.
He closed by saying that he was eager to hear from supply chain finance professionals. “We want to find out more about your perspectives, so if you have something to say, get in touch. We want to understand what’s going on so please do talk to us.”