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Advance Auto Parts is most vulnerable to supply chain financing, Moody's says

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Illustration: Aïda Amer/Axios

Advance Auto Parts, which is attempting a turnaround, is most vulnerable to risks posed by supply chain financing, according to Moody's Ratings.

Why it matters: Banks can quickly withdraw the short-term financing if they're spooked by an auto parts retailer's financial performance.

Zoom in: Of the auto parts retailers recently stress-tested by Moody's, Advance Auto Parts was "the most acutely exposed to this risk, given the severity of its performance challenges over the past two years and deterioration in its credit profile."

  • Currently the company has a Baa3 rating with a negative outlook, which is one downgrade away from being non-investment grade.
  • The retailer has been in turnaround mode, after seeing sales decline largely due to slow order fulfillment, Moody's senior analyst Stefan Kahandaliyanage tells Axios.

Catch up quick: Advance Auto Parts refreshed its management team last year under new CEO Shane O'Kelly.

Yes, but: Part of O'Kelly's plan is to sell its Worldpac business, which could fetch around $1.25 billion, Kahandaliyanage says.

  • Some of those proceeds would go towards paying off some of its $1.8 billion in debt, reducing leverage to between 2X and 2.5X EBITDA, he says, citing what the company has said publicly.
  • The challenge for Advance Auto Parts is to get its supply chain and efficiencies back to where they were, Kahandaliyanage adds.

The big picture: An accounting requirement instituted last year has auto parts retailers revealing how reliant they are on supply chain financing, amounting to $16 billion, the rating agency says.

Between the lines: The short-term financing is problematic because it both helps maintain and is reliant on a healthy credit profile.

  • As a result, any disruption to an auto parts retailer's business can trigger a domino effect.

How it works: Supply chain financing improves free cash flow by stretching out accounts payable.

  • Yet it is provided by banks that behave like vendors, which can withdraw their offer of credit if they lose confidence in the company's viability.
  • It forces the retailer to use more of its own cash upfront.

The latest: The auto parts retail segment is currently stable and supply chain financing is widely available, Kahandaliyanage says.

Advance Auto Parts did not respond to a request for comment.

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