Payables Finance – a Threat Averted

Those active in payables finance (often called reverse factoring or just simply supply chain finance but we prefer to the term payables finance as defined in the “Standard Definitions for Techniques of Supply Chain Finance” published last year by the ICC and ITFA amongst others) will have been concerned by the paper published by Moody’s relating to the use of payables finance by Abengoa, a Spanish solar energy company that is currently going through a local insolvency protection  process.

The Moody’s paper expressed their belief that Abengoa’s payables finance arrangements had “debt-like” features which could lead to reclassifying what had been trade debt for Abengoa, as the obligor of the receivables, into bank debt following the commencement of the programme. This would, of course defeat the purpose of these kinds of arrangements for many corporate users. The Abengoa programme had specific and unusual characteristics but it was unclear to what extent Moody’s views would become generalised and apply to payables financing in general. Clarity was urgently needed especially given that Moody’s had announced a review of its methodology for making adjustments to financial statements when rating companies.

Representatives of ITFA held a meeting in early December with Moody’s to express this industry concern and to argue that the use of payables finance was a legitimate and acceptable form of finance which should not automatically result in trade debt being re-categorised as bank or financial debt.

Moody’s have accepted our concerns and in their reviewed methodology have stated that use of such programmes must be examined case by case using careful analysis and judgement and will not result in an automatic reclassification of programme receivables. The methodology does not state what criteria will be used in this analysis and ITFA will therefore be publishing a paper on this subject in the near future with guidance on the issue utilising the insights gained during the meeting.