Corporate America braces for billions of dollars in unpaid bills as the effects of the coronavirus shutdown ripple through malls, offices and factories through global supply chains.
Paint suppliers, food manufacturers and truck rental operators are among a diverse group of publicly traded U.S. companies that have disclosed higher provisions in recent days against losses they expect from business partners late payment.
“It’s just industry-wide carnage,” said Howard Steel, a partner at law firm Goodwin Procter. “Everyone is stretching debt all the way through the supply chain.”
The growing credit problems facing non-financial corporations in the United States come on top of growing bad debt problems at banks, which increased loan loss reserves by tens of billions of dollars in the first quarter.
Accounts released this month show Amazon increased its provision for credit losses from $380 million in the first quarter to $1.1 billion, in part because of late payments for its cloud computing services, while Disney raised $160 million in the six months to the end of March. at $535 million. Disney said “liquidity issues” among theaters and other customers had “affected timely payments.”
Suppliers in the retail and fashion industries face particular challenges.
Provisions for bad debts at Columbia Sportswear more than tripled from a year ago to $28 million at the end of March. Jim Swanson, chief financial officer, said on the sportswear brand’s earnings call that reserves were far larger than anything it had set aside during the financial crisis.
Avery Dennison, the S&P 500 materials science group that makes and designs labels, said its provision for credit losses more than doubled from a year ago, from $15 million to $31 million. dollars. The company cited particular difficulties in the apparel industry and said customers in South Asia and Central America have been hit hard by the pandemic.
Several companies said most customers continued to pay their bills in a timely manner and that troubled accounts made up a small proportion of total receivables – products that have been delivered or used but not yet paid for.
However, the ramping up of reserves in such a short time shows that leaders are preparing for more distress in supply chains in the months to come.
US companies have been forced to increase provisions in part because of an accounting change introduced this year. Previously, they only needed to add to reserves when customers actually missed payments. Under the new standard, they must do so based on forecasts of future solvency.
While banks are most affected by the “currently expected credit loss” regime, because they make loans, listed non-financial companies must also comply.
Reza Van Roosmalen, head of KPMG, said the accounting change took effect coincidentally in the “most extreme of circumstances” and that the sharp rise in reserves was partly driven by the underlying economy.
“In many industries right now there are major issues with people considering delaying payment terms or not paying,” he said.
Fast food brands are among the most exposed as franchisees struggle financially. Yum Brands recognized an additional $29 million in bad debt in the first quarter, bringing the total to $101 million, after certain KFC franchisees in Europe and Latin America and Pizza Hut franchisees in the United States fell behind in their payments.
Chris Turner, chief financial officer, said on an earnings call: “This is a truly unprecedented situation and the pandemic is putting a strain on our franchisees, especially in markets where stores have been closed.”
Other S&P 500 companies that increased provisions for credit losses in the first quarter included fleet management and logistics company Ryder System, where they rose from $23 million to $41 million. The company cited “slower Covid-19 related payment activity”.
PPG, the coatings supplier, more than doubled its provision for bad accounts in the first quarter, bringing its total to $50 million. Vince Morales, chief financial officer, said PPG had added reserves “in each of our businesses, in each of our regions,” adding that executives were particularly concerned about small businesses.
Pepe Rodriguez, managing director and partner at the Boston Consulting Group, said companies exercise “lenient selectivity” in dealing with late payments to avoid alienating business partners or pushing them out of business.
“If you push too hard, you’ll find yourself better able to weather the storm, but not necessarily be in the position you’d like to be in the recovery,” he said. “There is always a rebound.”