More Debt Shell Games
Supply chain financing is finally getting the attention it deserves
Our last report explored how companies can have very material future cash flow obligations that don’t show up on the long-term liabilities section of the balance sheet. Failure to consider these amounts can leave investors with a very distorted picture of the company’s true leverage position. In addition to these off-balance sheet liabilities, many companies have managed to shift meaningful amounts of their leverage to working capital accounts where it is overlooked by many. Supply chain finance programs are one such method.
For some time now, we have been warning institutional clients about the expanding use of supply chain finance arrangements which have allowed some companies to greatly enhance cash flow growth by extending payment terms with suppliers. Our October 2022 piece Mom and Dad Just Pulled into the Driveway documented how the FASB issued new guidelines requiring companies to disclose certain details about any supply chain financing program they supported beginning in 2023. Now that the FASB rules have gone into effect, the real extent of these programs and how material they are to some companies’ financial footings are starting to get the public’s attention. We recently read an interesting article in Bloomberg called New Rules Reveal $64 Billion of Hidden Leverage at Big US Firms which gives a great overview of the issue.
Many companies had already disclosed the existence of such programs, some after a gentle push by the SEC. We documented some of these cases including how out of control Keurig Dr Pepper’s (KDP) payables have become over the years in our June 2022 piece We Will Gladly Pay You Tuesday for Some Raw Materials Today. Not all SCF’s are as extreme as KDP’s. However, many companies may still see a material impact on their results if these programs unwind in the wake of higher interest rates. We will examine how analysts should be viewing these programs and give some examples of recent new disclosures.