Guidance on COVID-19 pandemic impact

Posted by James H. Gellert on March 06, 2020
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In our latest report we take a close look at COVID-19 and its impact on global supply chains. Here's a brief overview before you download the full report below:

COVID-19 is affecting most companies and professionals directly or indirectly.  The entire RapidRatings team is sensitive to the business impacts this causes and how our clients' businesses are impacted.  We at RapidRatings consider our Financial Health Rating and Core Health scores to be, amongst other things, measurements of how well a company is positioned to withstand unanticipated shocks.  While RapidRatings’ clients leverage Financial Health to build resiliency and to identify weak links in their global supply chains on an ongoing basis, the acute nature of disruption from COVID-19 creates an opportunity to do more with RapidRatings’ data and reporting. 

The COVID-19 virus is upending global markets and supply chains, and the extent of its impact remains unclear.  For domestic Chinese companies, and for global companies with supply chain and customer exposures in China, Korea, Italy and other impacted countries, the effects will be enduring.  It is a daunting time for organizations around the world assessing the impacts to their businesses and many have “war rooms” established and tremendous resources allocated to triage; e.g., identifying risks, formulating mitigation strategies and adjusting supply chains and business strategy accordingly.  From our vantage point assessing global supply chains, we estimate that companies in China, Korea and Italy alone make up approximately 12% of a typical global company’s tier-1 supply base exposure.

RapidRatings rates thousands of public and private companies throughout China.  In addition, we rate companies in Korea, Italy and over 140 additional countries around the world.  COVID-19 will have a disproportionately severe impact on weaker companies, just as it does on humans in weaker health.  Companies we rate in our High-Risk and Very High-Risk zones (40 and under on our 100-point Financial Health scale) are most susceptible to the disruptions caused by the virus.  Over the last 20 years, more than 90% of companies that failed were rated 40 and below at time of failure and had experienced deterioration over the 12, 24 and 36 months prior.   Stronger Financial Health companies are more resilient, a trait that’s as much on display with healthy humans.

We can categorize novel coronavirus-related risk areas in the following ways:

  1. Direct impact on companies: Companies that are currently in COVID-19 geographic zones, and those that will be on the front lines shortly.  At this writing, most concern is directed at China, Korea, Japan, Italy and Iran.  There are short-term, and longer-term risks to these businesses.
  2. Secondary company impact: Companies buying from these directly impacted businesses (supply chain risk) and those selling to these businesses (customer credit risk). There are short-term, and longer-term risks to these businesses.
  3. International companies’ direct sales: Companies that sell to consumers in these regions.  There are mostly short-term impacts to these businesses.
  4. International companies’ inventories: As key inputs to the production process become scarce, there continue to be many unknowns in terms delivery times and these present material shorter-term risks to global businesses.
  5. Macro-economic impact: GDP, interest rates and other systemic measures will be impacted across the globe, though most specifically in the geographic zones where COVID-19 is and becomes prevalent.  This economic impact will accelerate recessionary concerns and will most certainly create greater risk of ending our current credit cycle.
  6. Credit cycle and availability of capital: Volatility and an increase in global default rates will accelerate the end of the current, historically long, credit cycle.  Companies around the world may suffer from less availability of capital, and for many, higher rates will be a result even when capital is available  This will be most severe for those companies with the weakest Financial Health.  This returns us to categories 1 and 2. 

Visit our COVID-19 resource center or download the entire report by clicking below: 

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Topics: Supplier Risk Management, Market Events, COVID-19, Coronavirus