Credit risk is topping the agenda of transportation finance meetings as leaders weigh the impact of inflation, interest rates and other global economic stressors on the industry. A recent article from The Wall Street Journal, "Junk-Loan Defaults Worry Wall Street Investors," noted that defaults on leveraged loans hit $6 billion in August of 2022.* This amount is the highest monthly total since October 2020 when the U.S. economy was in the midst of navigating the COVID-19 pandemic.
The rise of defaults can be partly attributed to interest rate increases from the U.S. Federal Reserve which has added to the interest expense burden on the borrower. Since the Fed signaled its intention to maintain higher interest rates, this could present liquidity challenges for companies with sizeable debt loads.
Further, trade payables due from highly leveraged companies pose even greater risks to suppliers since they are unsecured creditors and as such are junior in the payment waterfall to senior secured lenders. Empirically, the data shows that post-bankruptcy and reorganization recoveries to general unsecured creditors are now at historic lows.
What does the rise in defaults mean for transportation companies?
Since transportation companies often work with customers and suppliers across a wide range of industries, managing and then predicting credit risk can often be a challenge. Some industries tend to be more leveraged than others and without full visibility into a counterparty's financials, it's hard to prepare for what an economic downturn could bring. This uncertainty is even further complicated by the rising geopolitical uncertainties around the world, especially for companies working with foreign suppliers and customers.
Managing customer credit risk
Managing customer credit exposures can be a tedious task, even when a formal credit team is in place to manage these processes. Solutions such as credit insurance protect against credit losses while also serving as a tool to help companies increase sales and manage credit risk better. Most credit insurance policies also include political risk coverage which protects companies' ability to be repaid in the event that political events or arbitrary government actions prevent such repayment.
Managing supply chain risk
Beyond credit risk, companies should also evaluate supply chain risks which continue to increase in step with rising global geopolitical instability.
Trade Disruption Insurance (TDI) is a solution that indemnifies the policyholder from business income losses which are incurred along the intended delivery routes and result from the delay or non-arrival of goods. TDI is essentially an all-risk business interruption (BI) policy that — unlike traditional BI coverage — doesn't require that there be physical damage to the client's assets for the policy to respond. Furthermore, the covered losses under a TDI policy are quite broad and can include both political and physical perils. For transportation companies, TDI can also be used to cover contractual penalties resulting from late delivery.
While the industry continues to navigate current challenges like these, it's critical to work with a team of transportation experts to help you address economic impacts on your business and create a risk management program that closes gaps and supports the continuous running of your business.