AT&T has plenty of debt. The US telecommunications firm’s complete borrowings stretch properly north of $130bn, an even bigger debt pile than many nations.
AT&T additionally has plenty of what could possibly be termed “hidden debt”. Hidden, that’s, till a latest accounting change solid a lightweight on billions of {dollars} of liabilities buried in its books for the primary time.
As astute readers might have already guessed, FT Alphaville is speaking about supply-chain finance, a once-niche method of juicing company stability sheets that grew to become infamous when specialist agency Greensill Capital imploded in 2021.*
For the uninitiated, supply-chain finance is usually referred to as “reverse factoring”, as a result of it’s a newer spin on the centuries-old strategy of “factoring” invoices to lift money.
In easy phrases, a (usually giant) firm has an settlement with a monetary establishment to pay the payments it owes to its suppliers sooner than deliberate. Whereas the smaller suppliers receives a commission extra rapidly, the trade-off is that they obtain barely lower than they’re owed. The monetary establishment later collects the total quantity of the bill from the big firm, pocketing the distinction.
Listed here are the fundamentals in chart type, for many who like arrows going forwards and backwards:
The approach has all kinds of balance-sheet flattering advantages, corresponding to serving to an organization push out the time it takes to pay its payments (rising its “days payable excellent”). However essentially the most infamous one is that this: whereas an organization that makes use of supply-chain finance owes cash to a monetary establishment, accountants don’t class these amenities as debt.
The important thing drawback for traders making an attempt to become familiar with corporations’ use of supply-chain finance has been the shortage of disclosure.
Provide-chain finance obligations are usually booked via the “accounts payable” line of an organization’s stability sheet, the place they’re co-mingled with all the opposite payments owed to suppliers. When you’re fortunate, a footnote would possibly clarify how a lot of the cash is definitely owed to monetary establishments, reasonably than suppliers. Nonetheless, traditionally there was no requirement to reveal using supply-chain finance.
Within the US, the Monetary Accounting Requirements Board has lately tried to shut this loophole, final 12 months introducing new accounting guidelines mandating corporations to reveal their use of what FASB phrases “provider finance”.
Consequently, scores of US corporations disclosed their supply-chain finance programmes for the primary time of their first-quarter outcomes this 12 months. Our buddies at Bloomberg totted up $64bn of hitherto “hidden leverage” revealed throughout company America via these disclosures, producing this useful chart of the most important customers of supply-chain finance:
However FTAV observed that one family title is conspicuously absent from this high 5, despite the fact that it has what could be broadly termed “payables finance” programmes stretching to almost $13bn.
And in making an attempt to know why the corporate in query doesn’t class all of those amenities as supply-chain finance, we come across a number of the vital limitations of the brand new FASB-mandated disclosures.
The Texas three-step
Earlier than we delve into the nitty-gritty of AT&T’s provider finance disclosure, it is sensible to have a look at rival telecommunications firm Verizon’s as a benchmark.
In spite of everything, not solely are each corporations fierce rivals within the US wi-fi communications market, however they each carry investment-grade credit score rankings (albeit the three main businesses rank Verizon’s debt one notch higher).
Right here is Verizon’s newest disclosure in full, taken from its quarterly report for the interval ended March 31, 2023:
We keep a voluntary provider finance program (SFP) with a monetary establishment which supplies sure suppliers the choice, at their sole discretion, to take part in this system and promote their receivables due from Verizon to the monetary establishment on a non-recourse foundation. The eligible suppliers negotiate the phrases instantly with the monetary establishment and we’ve got no involvement in establishing these phrases nor are we a celebration to those agreements.
Our funds related to the invoices from the suppliers taking part within the SFP are made to the monetary establishment based on the unique bill phrases usually at 90 days from the bill date and for the unique bill quantity. No further funds are exchanged between Verizon and the monetary establishment associated to the SFP. Verizon doesn’t pledge any property nor present any ensures to the monetary establishment in reference to the SFP. The SFP could be terminated by Verizon or the monetary establishment with a 60-day discover interval.
Confirmed obligations excellent associated to suppliers taking part within the SFP are recorded inside Accounts payable and accrued liabilities in our condensed consolidated stability sheets and the related funds are mirrored within the working actions part of our condensed consolidated statements of money flows. As of March 31, 2023 and December 31, 2022, $705 million and $1.0 billion, respectively, remained as confirmed obligations excellent associated to suppliers taking part within the SFP.
As these new disclosures go, it appears pretty benign.
The New York-based telco doesn’t look like stretching out its payables for an egregiously very long time (in distinction, another corporations have disclosed that they don’t repay the monetary establishments concerned for so long as a 12 months) and the quantities are comparatively small. Verizon’s $705mn excellent on the finish of the primary quarter of 2023 represents a small fraction of its $19bn accounts payable and a good smaller fraction of its $153bn complete debt.
Turning to its Dallas-based competitor, nevertheless, and the numbers concerned are usually not solely a lot larger, however the disclosure is extra convoluted:
Provider Financing Program
We actively handle the timing of our provider funds for working gadgets to optimize using our money and search to make funds on 90-day or better phrases, whereas offering suppliers with entry to financial institution amenities that let earlier cost at their value. Our provider financing program doesn’t lead to adjustments to our regular, contracted cost cycles or money from operations.
On the provider’s election, they will obtain cost of AT&T obligations previous to the scheduled due dates, at a reduced value to the third-party monetary establishment. The discounted value paid by taking part suppliers relies on a variable price that’s listed to the in a single day borrowing price. We conform to pay the monetary establishment the acknowledged quantity usually inside 90 days of receipt of the bill. We should not have pledged property or different ensures underneath our provider financing program.
Primarily based on information from our monetary establishment companions, suppliers had elected to promote $2,557 of our excellent cost obligations as of March 31, 2023 and $2,869 as of December 31, 2022, that are included in “Accounts payable and accrued liabilities” on our consolidated stability sheets. Our provider financing applications are reported as working or investing (when capitalizable) actions in our statements of money flows when paid.
Direct Provider Financing
We even have preparations with suppliers of handset stock that enable us to increase the acknowledged cost phrases by as much as 90 days at an extra value to us (variable price extension charge). All funds are due inside one 12 months. We had $5,129 of direct provider financing excellent at March 31, 2023 and $5,486 as of December 31, 2022, that are included in “Accounts payable and accrued liabilities” on our consolidated stability sheets. Our direct provider financing is reported as working actions in our statements of money flows when paid.
Vendor Financing
In reference to capital enhancements and the acquisition of different productive property, we negotiate favorable cost phrases of 120 days or extra (known as vendor financing), that are reported as financing actions in our statements of money flows when paid. For the three months ended March 31, 2023 and 2022, we recorded vendor financing commitments associated to capital investments of roughly $1,021 and $954, respectively. We had $5,003 vendor financing payables at March 31, 2023, with $3,531 included in “Accounts payable and accrued liabilities” and $6,147 vendor financing payables at December 31, 2022, with $4,592 included in “Accounts payable and accrued liabilities.”
Let’s break it down.
The disclosure underneath the primary heading “Provider Financing Program” is broadly just like Verizon’s, albeit the quantities concerned are multiples bigger. AT&T’s greater than $2.5bn of provider financing excellent at March 31 is over 3.5 occasions the equal at Verizon.
However then, on high of that, AT&T had even bigger quantities excellent underneath so-called “Direct Provider Financing” and “Vendor Financing” programmes. And the numbers get very giant certainly while you sum up the liabilities underneath these three programmes, with $12.69bn excellent as of March 31, 2023 and $14.5bn as of December 31, 2022:
As with the provider finance, AT&T is basically reserving these things via its accounts payables line. We are saying “largely” as a result of a bit of the seller financing is elsewhere, we presume as a result of it has a long term than a 12 months, making them noncurrent liabilities.
In distinction to its provider financing, nevertheless, AT&T books repayments of the seller financing via the financing actions part of its money move statements, together with debt and dividend funds, suggesting that in some methods it’s much more finance-y:
This all presents an apparent query: aren’t these three types of financing simply totally different spins on supply-chain finance?
Linguistically at the least, “direct provider finance” appears fairly straightforwardly a variant of “provider finance”, whereas the phrase “vendor” can be a synonym of “provider”.
Shouldn’t AT&T actually lump them collectively and disclose all of it as one double-digit billion greenback determine?
After a very long time taking part in spot the distinction with the three descriptions, nevertheless, we observed a delicate distinction: there isn’t any point out of a “third-party monetary establishment” within the direct provider finance and vendor finance disclosures.
It means that AT&T, reasonably than a financial institution it has employed, pays these invoices.
And for the needs of the brand new US disclosures, that distinction issues. See this extract from FASB’s accounting requirements replace on “provider finance applications”, our emphasis in daring:
Provider finance applications, which additionally could also be known as reverse factoring, payables finance, or structured payables preparations, enable a purchaser to supply its suppliers the choice for entry to cost upfront of an bill due date, which is paid by a third-party finance supplier or middleman on the premise of invoices that the customer has confirmed as legitimate.
Usually, a purchaser in a program (1) enters into an settlement with a finance supplier or an middleman to determine this system, (2) purchases items and providers from suppliers with a promise to pay at a later date, and (3) notifies the finance supplier or middleman of the provider invoices that it has confirmed as legitimate. Suppliers might then request early cost from the finance supplier or middleman for these confirmed invoices.
On the face of it then, evidently with no middleman concerned in AT&T’s so-called “direct provider financing” and “vendor financing”, they don’t meet FASB’s standards for “provider finance”.
With these different kinds of preparations, AT&T may both settle invoices early itself at a reduction — reserving the acquire a financial institution would usually earn — or pay an interest-like charge to the provider in change for pushing out the cost date. As one supply-chain finance specialist put it to FTAV: “You’re actually placing your provider within the function of a financial institution”.
And this doesn’t essentially imply that banks are usually not concerned in any respect.
After incomes a charge from AT&T in change for extending cost phrases, a provider may then flip round and issue those self same excellent invoices with a financial institution of its selecting. So long as it wasn’t AT&T’s financial institution that the telco had enlisted to acted as an middleman, it wouldn’t technically be provider finance underneath the FASB tips.
FTAV requested AT&T about its provider finance disclosures and it stated the next:
Provider financing supplies diversification and suppleness as a part of our total capital administration methods. Our disclosures are in step with our focus to supply transparency for our stakeholders.
Clouds on the Verizon
Having established that the brand new US accounting requirements don’t require corporations to reveal financing preparations with suppliers the place they haven’t enlisted an middleman to pay their invoices, it struck FTAV that different giant US corporations may have interaction in related practices to AT&T and not disclose them in any respect.
At this level, we determined to return to Verizon. Did the corporate additionally have interaction in “direct provider financing” and “vendor financing”? Verizon answered as follows:
“Direct provider financing” and “vendor financing” applications that you just seek advice from are exterior of the scope of the [Accounting Standard Update] for provider finance applications.
FASB’s Accounting Normal Replace (ASU) 2022-04, applies to disclosure of provider finance program obligations. Verizon’s disclosure in our Q1’23 10-Q features a disclosure of excellent quantities underneath such obligations, in addition to an outline of cost and different key phrases of this system. Verizon does take part in Vendor Financing Preparations, as disclosed underneath our “Liquidity and Capital Assets” dialogue within the [management discussion and analysis], and moreover with our Money Movement from Financing dialogue, when materials. Verizon doesn’t have a direct provider financing program.
So, Verizon doesn’t have interaction in direct provider financing, however it does make use of vendor financing. And whereas the corporate says it discloses its use of the financing approach, in its final quarterly and annual outcomes Verizon didn’t report the quantities excellent, merely that its “exterior financing preparations” embody “vendor financing preparations”.
Verizon additionally solely discloses vendor financing funds in its money move assertion when they’re “materials”. Whereas the telco disclosed “$320 million in funds associated to vendor financing preparations” in its 2021 annual report, there was no such disclosure in 2022, presumably as a result of it didn’t deem that 12 months’s funds as materials. (In response to additional questions on this, the corporate reiterated: “We solely disclose when exercise is materials to Verizon.”)
It’s value noting that Verizon’s use of vendor financing seems low in comparison with AT&T.
Whereas as lately as 2018 the previous’s annual vendor financing funds outstripped the latter’s, Verizon’s have since dwindled whereas the AT&T’s have ballooned:
It bears repeating: the numbers concerned at AT&T are massive. The $14.5bn of liabilities excellent underneath its three payables finance schemes on the finish of 2022 equated to over 10 per cent of its complete debt.
However at the least AT&T now discloses all of this in a single place. Different US corporations could possibly be paying their suppliers to increase cost phrases with their shareholders none the wiser.
With US publicly listed corporations gearing as much as report their second-quarter ends in the approaching weeks, FTAV recommends that analysts and traders probe somewhat additional on what’s and isn’t included of their provider finance disclosures.
The satan is, as ever, within the element.
* (As an apart, we’re nonetheless dissatisfied that nobody on the Treasury choose committee requested Greensill’s extremely paid boardroom adviser David Cameron to clarify merely the mechanics of how supply-chain finance works. We’ll ceaselessly cherish, nevertheless, the previous British prime minister’s assertion that whereas “there have been faults with the enterprise . . . it doesn’t imply that the entire thing was necessarily a giant fraud”.)
