The Financial Implications of Supply Chain Changes

Abstract

We examine how a firm’s bankruptcy affects the bank financing costs of its key suppliers. We do so by using an extensive, hand-collected data set that captures the supply chain relationships of bankrupt firms over the time period 1990-2009. Looking at a sample of more than 2000 loan contracts, we compare the average borrowing cost of suppliers in the two years prior to the bankruptcy of a key customer to the average cost in the two years following the announced bankruptcy. We find the average loan spreads increase by roughly 20% following the customer’s announced bankruptcy. These effects are even stronger if the bankrupt firm is operating within a distressed industry, or when there is a strong supplier-customer relationship. We also find that the structure of lending agreements significantly changes in the aftermath of a client bankruptcy. More specifically, we find that the number of covenant increases and the lead banker(s) take an increasingly important role in the period following the client’s bankruptcy. Taken together, this study provides new insights into the financial implications of supply chain changes.