A growing cohort of smaller companies that survived the cold depths of the pandemic say they are in danger because the economy is too hot.
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Mattresses sellers, flooring manufacturers and makers of clean energy equipment are warning that stretched supply chains and runaway freight bills have pushed them to the brink of ruin. Unlike global giants, they don't have the cash and scale to hire their own cargo ships or pass on the soaring costs, forcing them to seek private bailouts.
The roster includes Casper Sleep Inc., which accepted a buyout at a cost of a fire, along with a costly bridge loan. Armstrong Flooring Inc., reeling from a 21% cost increase, expects to violate its loan agreement, a fate that has already overtaken TPI Composites Inc., which got cash from distressed-debt specialists to keep the maker of wind turbine blades afloat.
Covid was tough to figure out in terms of consumer behavior and increased leverage, said Lisa Donahue, global co-head of the restructuring at AlixPartners. She said that it was really complicated when you add stress on the supply chain, coupled with inflation. If you have high leverage and other fixed costs to start with, you're going to find yourself getting pushed a lot closer to the edge. After landing in default, Aterian Inc., which sells consumer products ranging from coffee pots to office chairs online, had to hand lenders an equity stake. In July, the shipping rates went from $3,000 to $4,000 per container, with prices soaring from $3,000 to $4,000 per container, Chief Executive Officer Yaniv Sarig said in an interview.
Sarig said that was a lot of money for a company like us. When we realized that was happening, we had to make some very tough decisions. It included giving 9.3 million shares to its lender, High Trail Investments, at a 20% discount. The company says it is meeting all terms of its loans and that the worst is over, and there is still $25 million of debt outstanding.
There are so few distressed situations left after a year of easy credit and federal bailouts to soften the epidemic, which is why companies are warning of financial extinction. The second-lowest amount of distressed bonds in circulation is now $27.2 billion, the second-lowest amount in the past 14 years, according to Bloomberg Intelligence. The tally of all debt was closer to $1 trillion at one point in the pandemic.
There is no shortage of turnaround consultants as a result of the distressed drought and investors who specialize in troubled companies have a lot of idle cash looking for something to rescue.
AlixPartners is helping manufacturers straighten out kinks in their supply chains by moving operations onshore, working with their distressed suppliers and negotiating breaks from lenders.
Donahue said that many lenders have been amenable if borrowers have a clear plan of how they will manage the crisis. Investors who agree to help get rewarded with equity stakes, hefty interest rates and plenty of protection on loans they grant.
Joseph Weissglass, a managing director at the consulting firm Configure Partners, said that the flexibility is helping to keep firms from filing for bankruptcy for now. He said debt troubles are being resolved with light-touch restructurings out of court because of how expensive and disruptive a Chapter 11 case can be for small companies.
Aterian worked with its shipping partners and got help from Amazon, which has helped its merchants get better rates on containers. Sarig says he is confident about the holiday season, and his company is already well into preparations for 2022, ordering some products as much as a quarter sooner than normal.
Big retailers are able to steer clear of the logistics chaos and higher costs by themselves. Walmart Inc. is hiring more supply chain workers, chartering entire ships and rerouting them to less-congested ports. Chief Executive Officer Doug McMillon said during the earnings call that fighting inflation is in our DNA. Lucy Kweskin, a restructuring partner at law firm Mayer Brown, said retailers will need to show they can get product onto shelves and into customer hands for the holidays.
She said that anything retail-based that has struggled over the past couple of years is hoping to have a gangbusters holiday season. The companies it is going to affect the most are those that it is going to affect. No one expects supply chains to untangle any time soon. Normal could be anywhere from 18 to 24 months away, according to Donahue at AlixPartners. It is possible that the economy could lapse back into the Covid doldrums. Aterian s Sarig isn't expecting a routine economy until 2023, and he has a close eye on the next few months.
He said that we are not taking things for granted. Everyone is holding their breath to see how the winter plays out. None of the Wildfires Are Worse, and One Chemical Company is Reaping the Benefits.