We document that customer’s exposure to physical climate risk leads to unfavorable syndicated loan pricing for their suppliers. This finding is explained by a simple theoretical model and supported by empirical evidence, highlighting a novel liquidity-risk channel: customers with higher climate risk exposure delay payments by using more trade credit, thereby reducing suppliers’ cash flow. This form of liquidity risk, in turn, raises suppliers’
borrowing costs, especially when suppliers cannot easily switch to other customers or with lower bargaining power. We further find that customers’ own liquidity conditions and prior lending relationships with suppliers’ lead banks moderate the main effect. Beyond these immediate liquidity strains, suppliers also experience persistent sales declines following disasters affecting their customers.
