BA Boeing Co

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)

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