Fitch’s Warning On Supply Chain Finance Draws Criticism

Fitch Ratings raised eyebrows last month when the ratings agency issued a warning about supply chain finance. Now, the trade and finance industry is responding with criticism.

Fitch published a report last month warning of a “loophole” that allows corporates to use supply chain financing without classifying it as debt. The company said the strategy essentially allows businesses to keep those debts hidden, and it “may have negative credit implications.”

But reports in Global Trade Review on Tuesday (Aug. 14) said some industry experts are rejecting Fitch’s call to reclassify supply chain financing as debt.

Geoffrey Wynne, a partner at Sullivan & Worcester U.K., told the publication that the classification of supply chain finance as “other payables” is “very standard practice.”

“If there were any suggestion that they were helping mislead investors, they would be really appalled,” he said. “The simple answer is that this is a financing device to extending trade payables.”

“SCF [supply chain financing] is different [than] bank debt,” said Simmons & Simmons Partner Omar Al-Ali. “The problem with debt is you essentially have a very large liquidity issue on a specific day when you need to repay, say, $100 million. 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.”

Fitch’s report said the ability for the now-defunct U.K. government contractor Carillion to classify supply chain finance as “other payables” contributed to auditors’ and financial service providers’ inability to identify the extent of Carillion’s financial troubles.

Moody’s Investors Service issued a similar warning in late 2015 about supply chain financing, warning that the Spain energy group Abengoa and its use of reverse factoring had “debt-like” features and, in response, reviewed its rating methodology. At the time, the International Trade and Forfaiting Association (ITFA) challenged that review and fought Moody’s efforts to categorize trade debt as financial debt. In an interview with GTR, ITFA Chairman Sean Edwards said it is likely to challenge Fitch’s conclusions, too.

“ITFA had a very good dialogue with Moody’s. It looks like we’re going to have to start the dialogue with Fitch,” Edwards said. “There has been an increase in days payable, because it is very widespread. But does that mean that it should be treated as bank debt? I don’t think so.

“In abnormal cases, like possibly Carillion and Abengoa, they had additional features,” he continued. “In the case of Carillion, it dwarfed their other lines of finance.”