The $64 Billion of Hidden Leverage at Big US Firms

Changes to reporting requirements forced firms to reveal scale of supplier finance debt

Bottles of Keurig Dr Pepper soft drinks.

30 mai 2023 at 22:14 UTC+7

Debt or Not?

New accounting rules imposed on companies this year have revealed more than $60 billion of previously hidden leverage among the largest US businesses.

The majority of the companies have been reporting these so-called supplier finance obligations for the first time, following rules mandated in September by the Financial Accounting Standards Board.

Companies use this type of financing, among other things, to free up cash so they can invest in their operations, buy back stock, or issue dividends. It was almost all outside the view of investors and analysts — until now — and the new disclosures show how pervasive the practice has become.

About 80 companies in the S&P 500 index reported at least $64.1 billion worth of obligations in a type of borrowing that lets them postpone payments to suppliers, according to a Bloomberg analysis of filings. The number is expected to grow as more large companies report their first-quarter financials — only about 400 of the companies in the index have so far published their earnings.

Biggest Supplier Finance Programs in S&P 500

New disclosures show how companies stretch out supplier bills

Source: First-quarter SEC filings as of May 26, 2023
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Supplier finance, sometimes called reverse factoring or supply chain finance, sees companies making arrangements with lenders to pay supplier bills quickly. Suppliers accept a slightly lower payment in exchange for getting paid as soon as possible. Companies then pay the lender back anywhere from 30 days to as much as a year later, filings show.

The list of users varies across industry and geography and includes household names such as Philip Morris, Cigna and Target.

Target Stores Ahead Of Earnings Figures — A customer at Target in New York.Photographer: Bing Guan/Bloomberg
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It can be a relatively safe way to manage cash flows, but in recent years it’s been at the heart of the collapse of major corporations, especially outside the US. Carillion became one of the UK’s largest failures in 2018 after the contractor used reverse factoring to label almost £500 million of debt as “other payables,” hiding its indebtedness.

Greensill Capital (see more below) ran a large supplier finance program. It collapsed in 2021 after straying into riskier loans that were packaged and sold to third-party investors including Credit Suisse.

“We do believe these programs can be beneficial to companies,” said David Gonzales, accounting analyst at Moody’s. “We just want to make sure that we’re adequately understanding or at least thinking about the types of risks that happen if credit deteriorates or, these days, if the bank is no longer there.”

Much of the scrutiny has centered on the length of time it takes for companies to pay back the lenders, with S&P regarding any payables stretching longer than 90 days as a form of debt for the company purchasing products or services. However, half of the 80 firms that reported supplier finance programs didn’t disclose information on timing. The other half revealed payment terms running past 90 days.

https://www.bloomberg.com/news/newsletters/2023-05-30/new-rules-show-64-billion-hidden-debt-at-large-us-companies

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