Moody's : Reverse factoring’s rising popularity comes with high, but hidden, risks

Moody's : Reverse factoring’s rising popularity comes with high, but hidden, risks

20 September 2019 by Erik Timmermans

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Moody's announces a new publication on reverse factoring.

London, September 19, 2019

● Reverse factoring can weaken liquidity at a time of stress

● Few customers fully disclose their use of this financing technique

Improved transparency and disclosure is needed for reverse factoring (RF) as few customers reveal their use of this increasingly popular supply chain financing tool, some may not fully understand its risks and investors cannot assess their exposure in the absence of disclosure, says Moody's Investors Service today in a new report.

Reverse factoring, which contributed to the high-profile defaults at Abengoa S.A. and Carillion plc., can weaken liquidity at a time of stress, with termination of RF arrangements potentially leading to sudden and significant working capital outflow over a matter of weeks or months.

"Users of financial statements may not be aware of a customer's usage of reverse factoring, despite the potentially material consequences. The customer itself may not fully understand the added risk that accompanies the use of this financing technique," said William Coley, an Associate Managing Director at Moody's.

Reverse factoring is safest when used by very strong Aa-rated customers and when the objectives are predominantly margin capture and control of the supply chain. Risks heighten when customers' credit quality is weaker or when RF is used to stretch working capital.

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