What’s the Big Deal Behind Vodafone’s Supply Chain Finance Program?

In a recent TXF article on Vodafone's supply chain finance program and its early pay program, Oliver Gordon, features editor, said: “Vodafone has been using complex financial engineering devised by GAM and Greensill to enable it to profit from and invest in its own SCF offerings and bolster its DPO (days payable outstanding).”

In the piece, which I encourage you to read here, Vodafone SCF: Who's supporting who?, Gordon makes three arguments.

  1. First, Vodafone is using the GAM Greensill Supply Chain Finance Fund to invest in its own supply chain finance program, as a portion of the underlying assets in the fund are outstanding Vodafone payables and much of the investment is coming from Vodafone’s treasury. The 2018 annual report disclosed an investment of about $1.1 billion in the fund devoted to their own payables.
  2. Second, by using the GAM Fund structure, Vodafone maintains the related trade payables on its books. Even though the supplier is paid early, Vodafone does not reduce days payable outstanding. By using the fund, the monies involved in the process are not accounted for as an early payment to the supplier but as a continued outstanding payable coupled with an investment in a money-market security.
  3. Third, Vodafone, GAM and Greensill share the discount from the supplier with the split estimated at half for Vodafone, with Greensill and GAM sharing the other half.

Personally, I have no problem with a company wanting to use its cash to self-fund an early payment program for their suppliers in exchange for discounts. Many large corporates implement some form of dynamic discounting that enables their long tail suppliers, and specific segments — diversity suppliers, choice suppliers, small businesses — access to early payment once an invoice has been approved. In fact, this practice has been going on for decades and now technology allows companies to systematize it and offer it to select suppliers, different supplier segments or all suppliers.

I also have no problem if a company wants to use this construct to invest in their own payables or some other company’s payables. But this does bring up three important questions.

3 Questions Requiring Further Transparency

First, if a company wants to use their own cash to self-fund their suppliers, why not just use dynamic discounting, which achieves the same results but does not have to include other parties who need to be compensated?

What is the reason for working with a third-party fund, other than as the TXF piece says to ensure trade payables are not impacted. Why try to mask the program pretending that there is an arm’s-length funding vehicle for SCF? Is it due to the fact that under dynamic discounting, a company simply uses its cash to pay down accounts payable, thus if used aggressively, it could have a material effect on DPO?

To Vodafone, accounting drives behavior. When you use your own cash to pay suppliers early, you shrink your balance sheet (i.e., decrease cash, decrease AP). If you use an arm’s-length investment vehicle, you are reducing cash but increasing the short-term investment account, with AP staying unchanged. The supplier is paid out of the fund, and Vodafone has an investment. From an accounting standpoint, it’s treated as an investment and approved by their auditor as such. The liability is to the fund and not to the supplier, and Vodafone’s balance sheet is bigger than if they self-fund. Is this material to flag by auditors? The point is Vodafone just can’t liquidate that investment and move it to a cash account.

Second, did Vodafone provide a guarantee or IPU (irrevocable payable undertaking) to enable this construct?

I imagine they did, and by doing so, this is a higher level of comfort provided to the funder. The crux of the issue is if the buyer is confirming to the financial institution that it will pay at maturity of the invoice regardless of trade disputes or other rights of offset it may have against the supplier, then it is giving a higher commitment to pay to the financial institution than it owes to the supplier, and this may be construed as a bank financing, not a trade payable, on its books. (See related: Supply Chain Finance: Gray Area Abounds on Early Pay Programs, Accounting)

Third, by using third parties such as GAM and Greensill as well as an insurance company, which are all additional parties that need compensated, does the supplier end up getting the short end of the stick?

While you could argue wrapping insurance around this structure (it was rated A-bf by Moody’s) enabled a lower cost structure, it goes without question that a number of parties are receiving compensation for any invoices funded early. In dynamic discounting, it’s just the company that receives a discount for extinguishing a payable early, no different than what they have been doing for years when they offered select companies 2% net 10, or 2% discount if paid in 10 days.

All of this indicates a need by both the IFRS and its U.S. counterpart, U.S. GAAP, to provide guidance with respect to supply chain finance. The market is now big enough and continues to grow. As TXF says, Vodafone’s current structure adds to the growing calls for greater transparency about SCF funding and, more importantly, how it is reported in a company’s accounts.

David Gustin runs a research and advisory practice centered on helping financial institutions, vendors and corporations understand the intersection of trade credit, payments and the financial supply chain. This post was written while David worked on a special project with The Interface Financial Group. He can be reached at dgustin (at) globalbanking.com

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Voices (2)

  1. Fred Steyl:

    So Vodafone invests $1.1 billion in the fund devoted to their own payables. One assumes this is ring-fenced for their own SCF program, so there’s no risk to the fund.
    If that’s correct, why would an IPU or insurance be needed?

  2. Dr Ashley Waggoner:

    So Vodafone was a major investor in a fund which held Vodafone trade payables as a large proportion of its assets. In effect, Vodafone was lending to itself..?

    Were the underwriters of the non-payment insurance aware of this, and if not, might it undermine the validity of the insurance contracts?

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