Transportation Liquidity and Credit Analysis in a COVID19 Driven Recession

When the financial markets come under stress and the U.S. enters a recession, creditanalysis always comes back to the forefront and is the most important considerationof investors. This is where we find ourselves now in the aftermath of COVID-19becoming a global pandemic that has effectively shut down much of the globaleconomy.

One scary fact is that prior to COVID-19 becoming a pandemic (as of the end of 2019),the percentage of U.S. publicly traded companies that lost money in the prior 12months was about 40%, as the era of ultra-low interest rates and universal access tocapital reigned. According to 13D research in its recent report A corporate debtreckoning is coming, “one in six U.S. companies is now a zombie, meaning theirinterest expenses exceed their earnings before interest and taxes.” This figure is sureto grow as GDP falls as much as 40% in the second quarter. In addition, more than50% of all outstanding corporate debt is rated BBB, just one notch above junk, withthe vast majority of that figure due for a significant downgrade.

For the transportation markets, and particularly the trucking industry, credit issuesdo not yet appear to be manifesting themselves because of the initial boost to loadvolumes from panic buying and stocking up at the grocery store through March.

For transportation companies, the next two quarters should be characterized byrising bad debts, defaults, increasingly drawn down revolvers and withdrawnguidance from public companies due to a lack of visibility (and horrible operatingmetrics that many management teams would rather not divulge).