By Julie Steinberg
The U.S. Securities and Exchange Commission is asking blue-chip
companies about a popular financing arrangement that frees up cash
but potentially hides risks from investors.
The agency sent letters in June to Coca-Cola Co. and Boeing Co.
requesting more information about how they use supply-chain
finance, essentially a form of short-term borrowing to pay for
goods and services, according to securities filings.
The funding, often provided by banks, pays a company's suppliers
earlier than they would normally be paid, at a slight discount. It
then collects the balance from the company down the road, generally
later than the company would have paid their supplier directly.
While similar to loans, supply-chain financing is often not
clearly called out on a company's financial statements. Companies
typically record the transactions as accounts payable, leading some
to say they portray overly optimistic financial health, especially
if banks pulled the financing suddenly.
An SEC spokesperson declined to comment. The agency has
increased scrutiny of the practice over the past year and a half.
In June, the agency gave guidance on supply-chain and other types
of short-term financing in light of coronavirus disruptions. It
said companies should "provide robust and transparent
disclosures."
"There is almost no information about it" in financial
statements, said Ben Lourie, an assistant professor at University
of California, Irvine's Paul Merage School of Business. He worries
that people don't have the right information when building
valuation and risk models about companies.
In March, the SEC sent a letter to Atlanta-based paper-container
maker Graphic Packaging Holding Co. Last year, it sent similar
letters to Keurig Dr Pepper Inc., Procter & Gamble Co. and
home-improvement company Masco Corp. The companies' spokespeople
declined to comment.
The SEC sent its June letter to Coca-Cola after the agency
noticed the drinks maker's accounts payable increased around $1.1
billion in 2019. A bump in accounts payable can indicate increased
use of supply-chain financing to extend payment terms. The agency
had learned that Coca-Cola was a user of a supply-chain finance
program.
It asked Coca-Cola to provide the SEC with more details about
the supply-chain finance deals and uncertainties related to the
extension of payment terms. The agency also asked the company to
consider publishing changes in its account payable days
outstanding, a metric of how long it takes to pay its
suppliers.
The company said it hadn't previously disclosed the supply-chain
finance program, begun in 2014, because it hadn't materially
affected liquidity and wasn't likely to in the future. Coca-Cola in
a later response to the SEC said it would make disclosures about
the program in future filings. A Coca-Cola spokesperson declined to
comment further.
In Boeing's case, the SEC's letter was prompted by the company's
greater disclosure of its supply-chain financing in March. The
aerospace giant, which was later laid low by the coronavirus
shutdown of the travel sector, said trade payables included $4.5
billion payable to suppliers that were part of its supply-chain
financing programs, down from $5.2 billion at Dec. 31, 2019. It
said access to such financing could be curtailed if the company's
credit ratings were further downgraded.
The SEC letter to Boeing asked it to provide the impact of
supply-chain financing on its cash flows, how accounts payable
balances had changed owing to the programs, benefits and risks of
the arrangements and plans to extend terms to suppliers, among
other things.
Boeing responded that it didn't consider supply-chain financing
to be material to its overall liquidity, and that the decline was
due to fewer purchases from suppliers and not due to changes in the
availability of financing. It pledged to disclose in future filings
the amounts included in accounts payable as a result of the
supply-chain-finance programs and the impact on operating cash
flows each period.
In its latest quarter ending in June, Boeing said trade payables
were little changed from March.
A Boeing spokesperson declined to comment.
Supply-chain finance programs have multiplied in the years since
the financial crisis. Big players include Citigroup Inc. and HSBC
Holdings PLC, as well as nonbank firms such as SoftBank Group
Corp.-backed Greensill Capital.
The techniques have gained ground even as other forms of
short-term financing faltered during the coronavirus pandemic.
Banks generated $12.7 billion in the first half of the year from
supply-chain finance, up 3.6% from a year earlier even as revenue
fell 29% for commodities trade finance, according to research firm
Coalition.
Because the deals are private and there is little disclosure,
the size of the business is hard to pin down. Research firm Aite
Group says there may be more than $350 billion of invoices involved
in the supply-chain finance technique known as reverse
factoring.
Reverse factoring deals are seen as beneficial for both
companies and their suppliers, because the former can extend the
number of days they have to pay and suppliers can get paid
early.
Companies generally don't need to disclose supply-chain
financing arrangements. Moody's Investors Service in October said
fewer than 5% of the nonfinancial companies that it rates globally
disclose supply-chain financing in their financial statements.
The Financial Accounting Standards Board, the private
organization that sets accounting standards, has been soliciting
input from industry participants, a spokesperson said. The Big Four
accounting firms sent a joint letter in October to FASB asking for
guidance on how companies should account for supply-chain finance
transactions.
Mr. Lourie, the accounting professor, met virtually with FASB at
the end of July and recommended adding an extra line on the balance
sheet to report money that is owed to such deals. The line item
would have a note attached where companies would describe the terms
of the financing as well as how many days they had extended
payment.
Supply-chain financing has been at the heart of one recent
corporate blowup. It was a key contributor to the 2018 collapse of
U.K. firm Carillion PLC, according to Fitch Ratings, which had
reported supply-chain finance obligations as "other payables."
Write to Julie Steinberg at julie.steinberg@wsj.com
(END) Dow Jones Newswires
August 27, 2020 07:25 ET (11:25 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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