Its 2016 & Banks Rush to Defend SCF in Light of Abengoa

Balance sheet treatment of APF is hot (post Abengoa).” Senior Trade Banker

So all of a sudden I hear just because one analyst from Moody’s publishes a note on Abengoa’s supply chain finance structure, the banking world is up in arms about supply chain finance (“scf”) as an accounting trick to disguise leverage.


First, aren’t these the same rating agencies that rubber stamped those Mortgage securities. I won’t digress, since they are the only game in town, but let’s remember the devil is in the detail. No two scf legal structures are alike because the agreements and contract language between funders, service providers, companies, platforms and others may vary. And this is detail that matters. Like any scf program, they are all unique.

Abengoa specifically broke out the SCF/Confirming liabilities in its financial reporting, so nothing was hidden.  In fact, it was more disclosure than most companies make.  The rating agencies had all of this information. Abengoa’s story is well documented by TXF – I suggest reading the piece here.

But was Abengoa’s decline because they used supply chain finance to conceal their true financial situation or was it because they had bad and some could say fraudulent management that played accounting tricks, of which SCF was one? The SCF/Confirming lines of Abengoa were EUR 2.25bn against total debt exceeding EUR 22bn so I doubt this was big enough to have caused the downfall.

Regardless, there is no need to throw the baby out with the bathwater.

In Abengoa’s case, the trick was how much cash on their balance sheet was available versus how much was linked as a reserve for supplier payments.

Surely in these difficult times, where huge structural changes are occurring, providing early payment to suppliers and providing an option to retire receivables early is a good thing. Especially since everyone complains how small business gets screwed by big companies and there is a huge funding gap. WTO recently did a report on trade finance and SMEs .

Note there are many legal structures to do SCF, from promissory note structures to receivable purchase agreements to paying agents. More disclosure and transparency is a good thing. Multinational companies should be more upfront on their financial statements, especially if these programs are sizeable enough (note, many are not, and have underachieved based on expectations).

A company deploys a SCF scheme to improve working capital, not to replace traditional revolving credit facilities.

Let’s not throw the baby out with the bathwater just because of one bad apple. Sure, it makes news, but more transparency is needed before we declare these programs are tricks.

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First Voice

  1. Bob Kramer:

    David, great points. Shockingly, I have nothing to add!

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