November 2021 | Issue 240

Supply chain crisis hits credit amid shift to physical products

Hugh Minch
Credit investors are bracing for choppy waters as the supply chain crisis makes itself felt on company balance sheets heading into the year end, according to market sources. Investors believe manufacturers will have increasing difficulty servicing their debt as fourth quarter financials are reported in early 2022.
The range of policy initiatives intended to counter the covid-19 pandemic has produced a bottleneck in the global supply chain. Some companies are struggling to extract raw materials and others are struggling to transport goods worldwide.
At the same time, says Darius Mozaffarian, president and partner at direct lender White Oak Global Advisors, consumers are spending more on physical products than ever before.
“We’re in a unique time where consumers have allocated a lot of their discretionary income to purchasing products, instead of purchasing services, such as travel or leisure, that have been impacted by covid,” Mozaffarian says. “Product demand has never been higher at a time when product supply is going through hiccups.”
“The crisis will take nine months to a year to work its way through the system”
Darius Mozaffarian, President and partner | White Oak Global Advisors
Mozaffarian says one of his portfolio companies that makes aftermarket accessories for the auto industry saw its margins squeezed after an extreme shortage of copper wire led to prices quadrupling in 12 months. Companies are unable to raise prices fast enough to cover increased overheads without affecting demand for their products, and therefore margins are being squeezed.
The headwinds for companies are increased by wage inflation and the threat of interest rate hikes in 2022, though products such as loans and CLOs are protected against rate rises. One CLO manager told Creditflux that supply-side inflation is better and more easily managed than demand-led inflation.
Investors are split on exactly when the supply chain crisis will abate, though most expect the issue to gradually resolve itself through next year. White Oak’s Mozaffarian expects the crisis will take nine months to a year to work its way through the system, but the impact on debt investors will be felt most acutely in the early months of 2022.
“I think a lot of investors will have already seen covenants get passed successfully, but by narrow margins, and are probably looking into the fourth quarter thinking about their options,” he says. “I’m sure topics of conversation around amendments or forbearance are starting to occur.”
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Global credit funds & CLO's
November 2021 | Issue 240
Published in London & New York.
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