NEW YORK (BLOOMBERG) - A growing cohort of smaller companies that survived the cold depths of the Covid-19 pandemic say now they are in danger because the economy is too hot.
Mattress 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 do not have the cash and scale to hire their own cargo ships or pass on the soaring expenses, forcing them to seek private bailouts.
The roster includes Casper Sleep, which accepted a buyout at a fire-sale price along with a costly bridge loan. Armstrong Flooring, reeling from a 21 per cent cost increase, expects to violate its loan agreement, a fate that has already overtaken TPI Composites, which got cash from distressed-debt specialists to keep the maker of wind turbine blades afloat.
"Covid-19 was tough enough to figure out in terms of consumer behavior, increased leverage," said AlixPartners global co-head of restructuring Lisa Donahue.
"And then you add stress on the supply chain, coupled with inflation - that makes it really complicated," she said. "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."
Aterian, which sells consumer products ranging from coffee pots to office chairs online, had to hand lenders an equity stake after landing in default. Dramatically higher shipping rates were the cause, with prices soaring to US$20,000 (S$27,297) per container in July from US$3,000 to US$4,000 before the pandemic, chief executive Yaniv Sarig said in an interview.
"That's a lot of money for a company like us," Mr Sarig said. "So when we realised that was happening, we had to make some very tough decisions."
This included giving about 9.3 million shares to its lender, High Trail Investments, at about a 20 per cent discount. There is still US$25 million of the debt outstanding; the company says it is now meeting all terms of its loans and that the worst is over.
One silver lining to the distressed drought is that investors who specialise in troubled companies have plenty of idle cash looking for something to rescue, and there is no shortage of turnaround consultants.
Big retailers have more ways to steer around the logistics chaos and higher costs by themselves. Walmart, for instance, is hiring more supply chain workers, chartering entire ships and rerouting them to less-congested ports.
"Fighting inflation is in our DNA," CEO Doug McMillon said during this week's earnings call. "Sam Walton (Walmart founder) loved that fight and so do we."
Mayer Brown restructuring partner Lucy Kweskin said that retailers will need to show they can get product onto shelves and into customer hands for the holidays.
"Anything retail-based that's struggled over the past couple of years is hoping to have a gangbusters holiday season," she said. "Those are the companies that it's going to affect the most."
Alas, no one expects supply chains to untangle any time soon.
Ms Donahue at AlixPartners hears that normal could be anywhere from 18 to 24 months away. Meanwhile, it is still possible the economy could lapse back into the Covid-19 doldrums. Aterian's Mr Sarig is not expecting a routine economy until 2023, and he has a close eye on the next few months.
"We're definitely not taking things for granted," he said. "Everyone is kind of holding their breath to see how the winter plays out."