The $64 Billion of Hidden Leverage at Big US Firms
Changes to reporting requirements forced firms to reveal scale of supplier finance debt
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.
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.
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.”
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