Revolving Credit Facilities? – Nestle & Walmart Example

Revolving credit facilities are pretty helpful for companies if they want to pursue upcoming opportunities and they don’t have immediate cash handy.

Revolving Credit Facilities are basically pre-approved corporate loans facilities (just like credit cards) wherein corporates can avail loan without any further documentation and there are no fixed repayments schedules for the same. In this article, we will look into the details of revolving credit facility, how it is reported in the annual report and what all areas are important for Financial Analyst.

In this article, we will talk about the following –

• What do we mean by Revolving Credit Facilities?
• Revolving Credit Facility vs Credit Cards – Key Differences
• How to interpret Revolving Credit Facilities?
• Revolving Credit Facilities Example
• Nestle – Revolving Credit Facility
• WalMart Revolving Credit Facility
• In the final analysis

What do we mean by Revolving Credit Facilities?

Before we get into what revolving credit facilities are as per 10K, we need to know what it is at the first place.

Revolving credit facilities are a great flexible option for small business owners.

Here’s why –

• Small business owners often face difficulties in regards to pursue opportunities due to lack of cash.
• Small business owners often don’t have hefty collateral to take a huge loan from the bank.
• They often find that they don’t need much cash to pursue a new opportunity but lack of cash or their inability to take a loan makes it impossible.
• Even if small business owners take a loan, they feel threatened by equal installments in every certain period.

To solve all of the above, the concept of revolving credit facilities is being introduced.

Here’s how it works.

• The small business owner will talk to the bank about a credit facility. Bank will ask for a mortgage. Usually, for business owners, inventories or accounts receivables act as mortgages.
• Bank hands the business owners a revolving account where there is the pre-approved limit. If the business owners want to use little, she can do so. On the rest of the amount, an interest is being charged by the bank. For example, if the pre-approved limit is $30,000 and the small business owner only needs around $3000, the bank will charge interest on the outstanding amount.
• And if the business owner doesn’t take more credit facilities, she can pay back the amount in whichever ways she wants. There is no fixed monthly payment. The business owner can pay back the amount in 6 installments (the principal plus the interest) or in one go.

Now, you may wonder what the bank does if the small business owner fails to pay off the amount.

Bank values the inventories or the accounts receivables at 80% and then sell off the inventories or accounts receivables if the business owner fails to pay off the loan amount she has taken.

Revolving Credit Facility vs Credit Cards – Key Differences

It may seem like a credit card for small business owners, but it’s not. There are many differences. Let’s have a look at them one by one –

• In the case of credit card, the person needs to carry it. But in the case of revolving credit facilities, the person doesn’t need to carry any card.
• While using a credit card, the individual needs to make a purchase. But in the case of revolving credit facilities, the person doesn’t need to make any transaction. She can get the money directly into her business account for whatever reason she needs it.
• The fees charged for a credit card is often much more than the fees charged for the revolving credit facilities.
• Flexibility in terms of credit is much more in revolving credit facilities than a credit card.

How to interpret Revolving Credit Facilities?

Many companies in the US use the flexibility of Revolving Credit Facilities and usually, you will find that they report back on their balance sheet.

Let’s say, a company has taken a revolving credit facility from a bank. Now, where the company would report its revolving credit in the financial statements?

They would first set up their balance sheet. They will go to the section of debt and then usually, they will mention a note below the balance sheet where they will report about what exactly happens in regards to a revolving line of credit.

Now, what if they don’t mention?

Then it would be difficult for an investor to find out where the debt (the figure) has come from. If the company has done the calculation but doesn’t show the calculation and the exact narration of how it happened under the balance sheet, it wouldn’t be possible for the investor to understand it.

The filing system under sec filings is done to ensure that the investors’ interest is secured. Not showing or mentioning a revolving line of credit will be treated as non-disclosure and will not help the investor at all.

In the example below, we will show you how you would be able to do that.

Let’s take an example below and we will show you how you should interpret revolving credit facility in the SEC Filings

Revolving Credit Facility Example

In this section, we will take an example and will show you how to report and interpret revolving credit facilities in SEC Filings

Balance Sheet of ABC Company

	2016 (In US $)	2015 (In US $)
Assets
Current Assets	300,000	400,000
Investments	45,00,000	41,00,000
Plant & Machinery	13,00,000	16,00,000
Intangible Assets	15,000	10,000
Total Assets	61,15,000	61,10,000
Liabilities
Current Liabilities
Short term debt including current maturities	50,000	80,000
Accounts Payable	60,000	70,000
Deferred Revenue	30,000	45,000
Accrued Expenses	60,000	75,000
Long term Liabilities
Long term debt*	95,000	125,000
Deferred Revenue	20,000	15,000
Total Liabilities	3,15,000	4,10,000

 

Stockholders’ Equity
Preferred Stock	550,000	550,000
Common Stock	50,00,000	50,00,000
Retained Earnings	250,000	150,000
Total Stockholders’ Equity	58,00,000	57,00,000
Total liabilities & Stockholders’ Equity	61,15,000	61,10,000

This is the balance sheet we have. Now we will see how to represent the revolving credit facility. You can see an asterisk on Long term debt.

Let’s look at the note.

Particulars	2016 (in US $)	2015 (In US $)
Notes due in 2020	120,000	140,000
Revolving Credit Facility	25,000	20,000
	145,000	160,000
(-) Short-term debt including revolving credit facility	(50,000)	(80,000)
Long-term debt	95,000	80,000

In 2015, ABC Company has taken a revolving credit facility of US $50,000 from RVS Commercial Bank. They wanted to expand upon their operations by buying a new machine for their production house. So, in 2015, they took US $20,000 which was payable within 3 months of borrowing. That’s the reason it was treated under short-term debt. In 2016 as well, they took a revolving credit of US $25,000 from the same bank and the payment was due within 90 days of borrowing. So in this case as well, the revolving credit was included in the short-term debt.

In reality, it is much more complex (we will see in the practical examples).

Nestle – Revolving Credit Facility

Consolidated balance sheet as at 31^st December 2016 & 2015

Source – Nestle Annual Report

The above balance sheet is the depiction of the long term and short term debt of Nestle in the year 2015 and 2016.

Let’s have a look at how they report revolving credit facility under “notes” in their annual report. They have mentioned it under Liquidity Risk Management.

They have mentioned that they didn’t expect any refinancing issues and they have two revolving credit facilities. In the year 2016, they would have extended both of their revolving credit facilities by one year. Along with that the key factors of the note are –

• Firstly, they had mentioned about two new revolving credit facilities (of the US $4.1 billion and of EUR 2.3 billion) with an initial maturity date of October 2017. It had also been mentioned that the group has the ability to convert (if at all) in a one-year term loan.
• Secondly, they had also mentioned about the existing revolving credit facilities and their extended maturity date. The new maturity date of these revolving credit facilities (one of US $3.0 billion and another of EUR 1.8 billion) had been mentioned as October 2021.
• Thirdly, they had also remarked that these revolving credit facilities should be treated as a backstop to their short-term debt.

WalMart Revolving Credit Facility

Consolidated balance sheet of Wal-Mart as at 31^st January 2017 & 2016

source: WalMart 10K Report

Now, we will see how they have represented the revolving credit facilities.The above balance sheet of Wal-Mart has portrayed the short term borrowings and long-term debts.

In their annual report, they had a note in regards to short-term borrowings and long-term debts. Under that note, they have talked about their revolving credit facilities.

First of all, they had mentioned about their short-term borrowings which are depicted in the following representation –

source: WalMart 10K Report

Wal-Mart had been committed with 23 institutions, combining them to the US $15 billion as of 31^st January 2017 and 2016. Let’s have a glimpse of that in the table below –

source: WalMart 10K Report

They had also mentioned in the note that they had extended both five-year credit facility and 364-day revolving credit facility in June, 2016.

Related Articles –

• Debt vs Equity Financing
• Subordination Debt Risks
• Financing Acquisitions | Cash | Debt | Equity | LBO | Swaps
• Accounting for Convertible Bonds

In the final analysis

Revolving credit facility is a boon for many small business owners. Even giant companies are also taking advantage of this thing.

As an investor, if you would like to know where the company has reported its revolving credit facility, look at their annual report and find notes regarding risk management, credit agreement or short term or long term borrowings.