Transportation Liquidity and Credit Analysis in a COVID19 Driven Recession

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

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 12
months was about 40%, as the era of ultra-low interest rates and universal access to
capital reigned. According to 13D research in its recent report A corporate debt
reckoning is coming, “one in six U.S. companies is now a zombie, meaning their
interest expenses exceed their earnings before interest and taxes.” This figure is sure
to grow as GDP falls as much as 40% in the second quarter. In addition, more than
50% of all outstanding corporate debt is rated BBB, just one notch above junk, with
the vast majority of that figure due for a significant downgrade.

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

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rising bad debts, defaults, increasingly drawn down revolvers and withdrawn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