Supply chains: Broken supply chains threaten the ruin of growing numbers of small businesses

A growing cohort of small businesses that have survived the cold depths of the pandemic are now saying they are in danger because the economy is too hot.

Mattress sellers, flooring makers and clean energy equipment makers warn stretched supply chains and skyrocketing freight bills have pushed them to the brink of ruin. Unlike the global giants, they don’t have the money and scale to lease their own freighters or pass on rising expenses, forcing them to seek private bailouts.

The list includes Casper Sleep Inc., which agreed to a buyout at a discounted sale price as well as an expensive bridging loan. Armstrong Flooring Inc., reeling from a 21% cost increase, expects to breach its loan agreement, a fate that has already overtaken TPI Composites Inc., which has secured money from troubled debt specialists to keep the manufacturer of wind turbine blades afloat.

“Covid was hard enough to understand in terms of consumer behavior, increased leverage,” said Lisa Donahue, Global Co-Head of Restructuring at AlixPartners. “And then you add stress on the supply chain, coupled with inflation – it makes things really complicated,” she said. “If you have high leverage and other fixed costs to start with, you’re going to find yourself pushed much closer to the edge.”

Aterian Inc., which sells consumer products ranging from coffee makers to office chairs online, had to hand lenders equity stakes after missing debt payments. Significantly higher shipping rates were the cause, with prices climbing to $ 20,000 per container in July from $ 3,000 to $ 4,000 before the pandemic, chief executive Yaniv Sarig said in an interview.

“That’s a lot of money for a company like ours,” Sarig said. “So when we realized this was happening, we had to make some really tough decisions. This included donating about 9.3 million shares to its lender, High Trail Investments, at a discount of about 20%. There is still $ 25 million in unpaid debt; the company says it now meets all the terms of its loans and the worst is over.

Companies warning of financial extinction are standing out because so few other distress situations remain after more than a year of easy credit and federal bailouts to mitigate the pandemic. Bloomberg Intelligence estimates that distressed bonds outstanding total only $ 27.2 billion, the second lowest amount in 14 years. At one point in the pandemic, the tally of all troubled debts was closer to $ 1,000 billion.

One bright side of the distressed drought is that investors specializing in struggling businesses have a lot of unused cash looking for something to save, and there is no shortage of turnaround consultants.

AlixPartners helps manufacturers correct problems in their supply chains by moving operations ashore, working with their struggling suppliers and negotiating breakups with lenders.

So far, Donahue said, many lenders have shown a willingness for borrowers to come up with a clear plan for how they will handle the crisis. Investors who agree to help are rewarded with high equity or interest rates and sufficient protection on any loans they make.

The flexibility helps keep companies from going bankrupt at this time, according to Joseph Weissglass, managing director of consultancy Configure Partners. Given how costly and disruptive a Chapter 11 case can be for small businesses, he said, debt issues are resolved through out-of-court “light restructuring”.

Holiday hopes

Aterian worked with their shipping partners and got help from Amazon, which helped their merchants get better rates on containers. Sarig says he’s confident for the holiday season and his company is already well into preparations for 2022, ordering some products up to a quarter earlier than normal.

Large retailers have more ways around logistical chaos and higher costs on their own. Walmart Inc., for example, is hiring more supply chain workers, chartering entire ships, and redirecting them to less congested ports. “Fighting inflation is in our DNA,” Chief Executive Officer Doug McMillon said during this week’s earnings call. “Sam Walton loved this fight and so did we.”

Chain reaction

Retailers will need to show they can get products off the shelves and into the hands of customers for the holidays, said Lucy Kweskin, restructuring partner at law firm Mayer Brown.

“Anything based on retail that has struggled over the past two years is hoping to have a gangbuster holiday season,” she said. “These are the businesses that will affect the most.”

Sadly, no one expects supply chains to unravel anytime soon. Donahue at AlixPartners hears that normal could be anywhere from 18 to 24 months. Meanwhile, there is still a possibility that the economy will fall back into the Covid doldrums. Sarig of Aterian doesn’t expect a routine economy until 2023, and he’s watching closely for the next few months.

“We certainly don’t take things for granted,” he said. “Everyone is kind of holding their breath to see how winter unfolds.”

(With help from Matthew Boyle and Eliza Ronalds-Hannon)

(The one-stop destination for MSMEs, ET RISE provides news, insights and analysis on GST, exports, finance, politics, and small business management.)

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