INDUSTRY STEPS UP TO IDENTIFY ”BLACK SHEEP” IN SUPPLY CHAIN FINANCE by Shannon Manders, GTR



The International Trade & Forfaiting Association (ITFA) will soon release a set of guidelines to help those involved in supply chain finance assess their financing programmes and recognise instances where they are being misused – and when they should be reclassified as debt.

ITFA hopes the work will quell the recent alarm over supply chain finance (SCF) programmes brought about by the demise of two large European corporates – Abengoa and, more recently, Carillion. According to ratings agencies, supply chain finance (or, payables finance, as ITFA terms it) was a key contributor to these companies’ downfall.

To address this issue, ITFA is finalising a list of common features to help the payables finance industry identify such “extreme cases”, it announced last week at its annual conference in Cape Town.

“If a company’s payables finance programme fulfils these criteria, then the programme should be reclassified as debt,” said Jana Kalousova, UniCredit trade risk management director and a member of ITFA’s young professionals network, which is spearheading this research under the auspices of its market practice committee.

Common traits that have been identified thus far include payment terms – which are often far beyond what the industry extends (for Abengoa, it was 219 days) and programme size – which tend to be large (Carillion’s payables finance programme was worth up to £500mn). Other qualities include the fact that often additional collateral is required by banks to support these programmes (as was the case with Abengoa); the buyer pays the cost of the programme; the buyer repays beyond maturity; and that it is often a committed facility (although the last two points apply to neither Abengoa nor Carillion).

Kalousova outlined that a thorough evaluation of these features can be achieved provided that every party involved in the programme – including the company itself, its auditors and the ratings agencies – is “knowledgeable and well educated” and has all the information required to make the assessment.

ITFA’s soon-to-be-published research will suggest guidelines on methodology to evaluate payables finance programmes (“how to recognise the ‘black sheep’”, said Kalousova) and best practice for disclosing that information.

Part of this will include driving greater transparency of the financial statements of companies that implement such programmes, she added.

One of the main benefits of SCF is that the financing structure is not treated as debt for balance sheet purposes, but as a trade payable which isn’t considered leverage. A reclassification to debt would defeat the purpose of these kinds of arrangements for many corporate users.

“SCF is different to bank debt,” Omar Al-Ali, partner at Simmons & Simmons, told GTR recently. “The problem with debt is you essentially have a very large liquidity issue on a specific day when you need to repay, say, US$100mn. In SCF, you need to pay smaller amounts on spread-out days, which is less likely to give rise to liquidity issues. That is an important difference between the two.”

The above article was released by GTR on 12th September 2018.