As supply chains remain slammed by COVID-19, James Gellert, RapidRatings CEO, talks about the impact of the Omicron variant on suppliers caught in a credit squeeze.
ADAM SHAPIRO: Let's get to somebody who understands a bit of how omicron is going to play into the bottom line for several companies. James Gellert is the chairman and CEO at RapidRatings. And we keep talking about supply chain issues, but you keep-- you're drawing our attention to the fact that smaller companies that are part of supply chains may face a credit squeeze. Can you explain what you're trying to warn us about and what could be coming down the pike?
JAMES GELLERT: Sure, Adam. I think a lot of attention these days on supply chain is really focused on what I would consider to be the first wave or the current wave, which is about port disruptions, backups, trucking challenges, things like that, all of which are very real. What isn't being talked about as much is after this period is-- you know, after we clear these ports and we move forward, we're going to enter a stage where a lot of companies that have been disrupted by the current period and have degraded in their operational efficiency are going to be in a position where they're going to have a real challenge raising capital.
Companies coming into the crisis 18 months ago and for a number of years before that have had very easy access to capital. And all of the government intervention, PPP, and so forth has made it easier for companies to raise money, increase liquidity, and Band-Aid through this problem.
But as we get into a slightly more normal environment over the next couple of years, we're going to find that supply chains have a second wave of disruption. That's when a lot of these private companies and smaller public companies that have been able to raise capital and continue through this period are going to have a much tougher time. And that's going to create another set of disruption in the supply chain that people aren't quite as focused on as they should be.
ADAM SHAPIRO: And James, that's a long-term horizon. What are you hearing from your clients? Because you supply this kind of analytical data to companies that are determining whether or not to do business with one another. But what are you hearing from clients now that omicron is a reality? I realize this is a short-term question, but what is the short-term hold for these companies? What are you hearing?
JAMES GELLERT: It's a short-term question, but it's a long-term challenge in overall risk management within the supply chain that most companies have been thinking about or preparing for, for a long time, perhaps without knowing or expecting the severity of the crisis that we're currently in through the pandemic, all variants considered. But really, what companies are trying to do now is understand the financial health of their suppliers and the overall supply chain that they're exposed to and to understand how they can collaborate with those suppliers in a way that creates the most resiliency in their supply chain.
And that resiliency is about aligning with the strongest suppliers that are going to be able to grow with them through and after this period, but also to be able to mitigate the risks of some of the weaker suppliers, but also to be able to engage with some of the weaker suppliers, just to be able to work with them more closely, to be able to help them through this time.
And that really comes from collaboration, transparency, sharing of information about what the business needs are, so there isn't too much inventory being held or too little inventory being held, but really, so people can operate their companies in the most efficient manner possible. That really is done through collaboration and communication.
ADAM SHAPIRO: We've had so many analysts come on talking about the expected inventory buildout that will take place in 2022. If I'm hearing you, that's going to be perhaps more difficult as the smaller companies that are part of this supply chain that will assist in that buildout. Is there going to need to be some kind of new PPP or government intervention to help those companies obtain financing or get through the debt strangle that they might experience?
JAMES GELLERT: Well, that could very well be. It really will depend on just how accommodative the overall credit market is because the typical Fortune 1,000 type enterprise has in its supply chain, about 75% of it is going to be private companies. And a lot of those have fewer sources of capital than a larger public company would. If you look at an industry like retail, which is, of course, on everyone's minds these days, what you're seeing is an interesting squeeze where the short-term risks of both the smaller and the larger companies have decreased because of the access to capital, and they've really levered up. They've got a lot more liquidity than they've ever had.
But if you look at the smaller companies, the midsized and the smaller businesses and a lot of the private companies in retail, you're actually seeing a degradation and a deterioration of their core health, which is really a two to three-year outward look, as opposed to the financial health, which is a one-year default centric view, whereas the larger companies are actually still holding relatively solid from a core perspective.
So that means the smaller companies are being squeezed by the larger. And their inventory levels are higher, so they're having to hold more. They're not able to move product as much. And that means pretty inefficient working capital efficiency for them, which ultimately is going to be a challenge when we get through this period, and they need to start cycling in a more regular business environment.