Controversy continues to surround the negative comments on supply chain finance issues by Fitch Ratings last month. In its recent report, the ratings agency said, “The use of an accounting loophole allowing companies to extend ‘payables days’ by the use of third-party supply chain financing without classifying this as debt may be on the rise…we believe the magnitude of this unreported debt-like financing could be considerable in individual cases and may have negative credit implications”
Industry observers were quick to respond. “This is very standard practice,” Geoffrey Wynne, partner at Sullivan & Worcester UK told GTR. The magazine reported that Wynne’s firm is currently working on a transaction whereby the bank is allowing the buyer to negotiate for 360-day payment terms. “If there were any suggestion that they were helping mislead investors, they would be really appalled. The simple answer is that this is a financing device for extending trade payables.”
Fitch is not the first ratings agency to raise doubts about how supplier finance is presented to investors. Moody’s issued a warning in 2015 after the failure of Spain’s Abengoa, and more negative comments emerged after the collapse of UK construction firm Carillion earlier this year.
Nevertheless, says Fitch, “Supply chain financing continues to be actively marketed by banks and other institutions in the burgeoning supply chain finance industry. A technique commonly referred to as reverse factoring was a key contributor to Carillion’s liquidation as it allowed the outsourcer to show an estimated GBP400 million to GBP500 million of debt to financial institutions as ‘other payables’ compared to reported net debt of GBP219 million.”
This topic will be on the agenda at the Supply Chain Finance Community Forum in Amsterdam on 29th November.