Supply-chain finance programs seeing cuts as companies face high interest rates

These agreements with vendors, known as supply-chain or vendor financing, are popular because they allow buyers to hold on to their cash longer, and the short-term financing typically isn’t counted as debt on corporate balance sheets. But higher interest rates are changing the equation for some companies.

AT&T is paying down a program that has seen sharply rising interest rates since the Federal Reserve began hiking rates two years ago. “We used that as a cheap form of financing" when rates were at record-low levels, said Pascal Desroches, chief financial officer at AT&T. But those obligations have grown too expensive, Desroches said.

“It’s prudent to work that liability down, because it’s costing us," he said.

Keurig Dr Pepper’s program works differently, with vendors bearing the weight of higher interest rates. The beverage company is negotiating with vendors to pull back from its program, in return for charging lower prices on their goods.

Many companies relied on supply-chain financing during the pandemic to boost liquidity as they weathered manufacturing and logistics disruptions, as well as zigzags in consumer demand.

For most companies, supply-chain finance programs work like this: A third party, typically a bank, pays a vendor before the scheduled due date. The bank takes a cut of the supplier payment, with the amount typically determined by a benchmark interest rate and the buyer’s creditworthiness. The buyer then pays the bank at a later date. As interest rates have increased, the discounts vendors take on their payments have increased as well.

Separately, some companies such as AT&T also negotiate longer payment terms directly with their suppliers. In those programs, the buyer, rather than the supplier, pays the financing cost.

Despite pullbacks at some large companies with ample liquidity, many companies still find supply-chain finance programs beneficial in a high-rate environment because they offer buyers a way to boost cash without having to issue debt or take out a loan. Vendors, for their part, get payments in the door more quickly.

Supply-chain financing came under scrutiny from investors and standard-setters following its role in the 2021 collapse of investment firm Greensill Capital. A key concern: Companies can use the programs as a backdoor way to raise financing because balances are usually recorded under a company’s accounts payable rather than as debt. The Financial Accounting Standards Board in 2022 adopted rules requiring companies to disclose information about their programs, including the size.

Supply-chain finance programs can introduce volatility in a company’s cash flow or pose a liquidity risk—for instance, if the programs cease to exist and a company’s bills come due more quickly. Another concern is that once a company starts using this type of financing, it is hard to stop because exiting it involves taking a hit to cash flow.

“From a financial reporting perspective, it’s like a drug," said David Gonzales, senior accounting analyst at Moody’s Ratings.

AT&T negotiates extensions on payments for equipment, including switches, fiber, radios and antennas, under what it calls its vendor financing program. At the end of the first quarter, outstanding balances under the program were about $2 billion, compared with about $5 billion a year earlier.

AT&T typically agrees to pay an interest rate in return for a longer payment term, essentially taking on a short-term line of credit, according to Desroches. The rate is based on the benchmark secured overnight financing rate, he said. SOFR currently stands at about 5.3%, up from near-zero before the Fed’s rate-hiking campaign began in 2022.

“I’ve always viewed them as financing obligations," Desroches said. The company began paying off its vendor-financing balances in early 2023.

Paring back such obligations will help AT&T eliminate variables from its cash flow and plan with more certainty, the company said. Investors in recent years have punished the company’s stock for surprises, including a sharp decline in cash flow during the first quarter of 2023. AT&T delivered on its cash-flow guidance last year, and its share price is higher than it was a year ago. Shares on Tuesday closed at $18.82, up 17% from a year earlier.

AT&T also operates what it calls a direct supplier financing program, through which it extends payment terms on its smartphone devices. That program had a balance of about $3.9 billion as of March 31, compared with $5.1 billion a year earlier.

AT&T also provides more traditional supply-chain financing in which the company’s vendors can sell their receivables to a financial institution. That program had a balance of $3.2 billion at the end of the first quarter, up from $2.6 billion a year earlier.

Keurig Dr Pepper is scaling down its supply-chain finance program because it sees an opportunity in a high-interest-rate environment to renegotiate terms with vendors—and relieve some of the pressure it has felt from inflation in recent years. Under its program, Keurig Dr Pepper’s suppliers can choose to sell their receivables to a financial institution in return for faster, discounted payments.

“In an environment where there’s wage inflation and all of these other pressures hurting their margins, this is a tool that they can use to offset that," said Stephen Schwartz, head of supply-chain finance and accounts receivable securitization at Wells Fargo. The strategy works for companies with ample liquidity, he said.

Keurig Dr Pepper isn’t planning to eliminate its supply-chain finance program, but instead will work with vendors on a case-by-case basis, CFO Sudhanshu Priyadarshi said during a March 19 investor presentation. “We will make individual decisions depending on what the rate environment is," he said.

The Burlington, Mass.-based beverage company began reducing its program in late 2022. As of March 31, the company’s outstanding balances under the program totaled about $2 billion, compared with $3.9 billion a year earlier. Supplier financing accounted for 63% of the company’s $3.2 billion in accounts payable, down from 79% a year earlier.

Krispy Kreme, the Charlotte, N.C.-based doughnut chain, said its free cash flow took a hit during the first quarter from its efforts to exit vendor finance agreements. The company during the quarter reported negative cash flow from operations of $17.7 million, compared with operating cash flow of $10.4 million a year earlier.

As of March 31, the company’s vendor financing balances totaled $29.6 million, down from $139.1 million a year earlier. Beginning this year, Krispy Kreme expects its efforts to result in an annualized tailwind of between $3 million and $5 million in adjusted earnings before interest, taxes, depreciation and amortization, the company said on a Feb. 13 earnings call.

Krispy Kreme has wrapped up its work reducing its vendor financing balances, CFO Jeremiah Ashukian said on the company’s earnings call in May. “This is now largely complete," he said.

Write to Kristin Broughton at Kristin.Broughton@wsj.com