Corporate America is preparing for billions of dollars in unpaid bills as the effects of the coronavirus shutdown ripple from shopping malls, offices and factories through global supply chains.
Paint suppliers, food manufacturers and truck rental operators are among a diverse group of listed US companies that have disclosed higher provisions in recent days against losses they expect from business partners falling behind on payments.
“It’s just industry-wide carnage,” said Howard Steel, partner at the law firm Goodwin Procter. “Everybody is stretching payables throughout the supply chain.”
The rising credit problems facing non-financial companies in the US come on top of the growing bad debt woes at banks, which boosted reserves for loan losses by tens of billions of dollars during the first quarter.
Accounts published this month show Amazon increased its allowance for credit losses by $380m in the first quarter to $1.1bn, in part because of late payments for its cloud computing services, while Disney’s rose by $160m in the six months to the end of March to $535m. Disney said “liquidity issues” among cinemas and other clients had “impacted timely payments”.
Suppliers to the retail and fashion industries face particular challenges.
Columbia Sportswear’s bad debt provisions more than trebled from a year ago to stand at $28m by the end of March. Jim Swanson, chief financial officer, said on the sportswear brand’s earnings call that the reserves were far bigger 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 last year, from $15m to $31m. The company cited particular difficulties in the clothing industry and said clients in south Asia and Central America had been badly hit by the pandemic.
Several companies said most clients continued to pay bills in a timely fashion and that distressed accounts comprised a small proportion of total receivables — products that have been delivered or used but not yet paid for.
However, the ramp-up in reserves within such a short period shows executives are bracing for more distress in supply chains in the months ahead.
US companies have been forced to increase the 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 have to do so based on predictions about future creditworthiness.
While banks are most affected by the “current expected credit losses” regime, because they make loans, listed non-financial companies also need to comply.
Reza Van Roosmalen, principal at KPMG, said the accounting change had coincidentally taken effect in the “most extreme circumstances” and the sharp rise in reserves had been driven in part by the underlying economics.
“In a lot of sectors right now there are major issues with folks either looking at delaying payment terms or defaulting on payments,” he said.
Fast food brands are among the exposed as franchisees run into financial difficulties. Yum Brands recognised another $29m of bad debt expenses in the first quarter, bringing the total to $101m, after some KFC franchisees in Europe and Latin America and Pizza Hut franchisees in the US fell behind on payments.
Chris Turner, chief financial officer, said on an earnings call: “It’s a really unprecedented situation and the pandemic is causing strain on our franchisees, particularly in markets where stores have been closed.”
Other S&P 500 companies that increased allowances for credit losses in the first quarter included the fleet management and logistics company Ryder System, where they rose from $23m to $41m. The company cited “slower Covid-19 related payment activity”.
PPG, the coatings supplier, more than doubled its allowance for uncollectible accounts during the first quarter, bringing its total to $50m. Vince Morales, chief financial officer, said PPG had added to reserves “in every one of our businesses, in every one of our regions”, adding executives were particularly concerned about small businesses.
Pepe Rodriguez, managing director and partner at Boston Consulting Group, said companies were being “selectively lenient” in dealing with late payments to avoid alienating business partners or pushing them out of business.
“If you push too hard, you’re going to find yourself better able to weather the storm, but not necessarily to be in the position you want to be in the recovery,” he said. “There’s always a rebound.”