March 30, 2021 Unprecedented Winter Storm Disruptions

Disruptions from recent winter storms will have a lingering operational and financial impact on manufacturing and industrial companies.

As much of the country, particularly Texas and Mississippi, picks up the pieces from the recent unprecedented cold weather conditions, the manufacturing and industrials sectors will face lingering operational and financial impacts in the near and medium term.

While those along the Gulf are accustomed to hurricanes, flooding, and even tornadoes, no one was prepared for the extreme winter weather that left millions without power and water for days and weeks. Hurricanes Harvey and Katrina are ranked as the most destructive storms in U.S. history, causing $125 billion in physical damage in Texas and Louisiana. However, a recent projection by Texas-based economic research firm, The Perryman Group, indicated the ice storm could top these with as much as $295 billion in damages.

Supply chain disruption, power vulnerability, and employee safety/availability topped off the list of concerns of many executives during the frigid weeks of February, however as operations return to a state of normalcy, management should take a step back and assess what changes should be made to avoid such disruptions going forward.  As part of this reflection and self-evaluation, stakeholders should ask themselves whether such protective/defensive investments have strategic benefits to enhance and fuel growth.  Sometimes the best offense is a strong defense. 

Where chaos and uncertainty can breed confusion and fear, let’s take a look at some ways to minimize the financial impact and operational disruptions along with solutions that can support and drive growth.

How can businesses small or large turn this crisis into a success story?  

• There is no question as to the validity of the financial and operational disruptions that industrials businesses and manufacturers faced as a result of the recent ice storm. It is important for borrowers to understand the gravity of the situation, as well as the realities, and share the severity with all of your stakeholders, including your lenders. In situations like this, transparency will not only strengthen the relationship with your lenders, but also allow them to better understand and respond to potential borrowing needs.
• Unexpected shutdowns may provide operators with the ability to perform deferred maintenance or bring forward renovations or expansion ahead of schedule. It is important to capitalize on the downtime and make the most of it since it is not often you have the ability to stop production and make these repairs, upgrades and improvements. Another route when possible is to repurpose personnel to perform tasks that are accretive to the operations. Oftentimes, you can find out who the real ‘leaders’ are on the shop floor. 

How can companies drive growth while navigating unforeseen hurdles like natural disasters or workers strikes? What should they keep in mind for both the short and long term?  What specific areas of financial protection and investment should I be exploring to prepare my business for future disruptions?

• One of the many lessons that we have learned through the pandemic and the severe weather in the South is the vulnerability of our supply chain and distribution channels.  Undoubtedly, every business was impacted in some manner by one or both of these events. Take this opportunity to ask yourself what could have been done to prevent or mitigate the negative impacts to your business. For some, diversifying geographies for facilities can mitigate regional events like severe weather. Having the ability to flex the employee base also allows companies shift and utilization to absorb other operational disruptions.
• Additionally, there are a number of other questions that companies should be asking coming out of these disruptions such as:
  • Would more control over the supply chain through vertical integration or partnering arrangement have lessened the impact? 
  • Were any of my top vendors severely impacted because of recent events?  Does it make sense to diversify my supply base? Or should I approach these vendors and explore a potential M&A event?
  • Were other players in the supply chain given preferential treatment because of volume purchase commitments or other arrangements?
  • How big a role did transportation play in my supply chain or my distribution channels?  Should I diversify transportation providers or consider in-house trucking capabilities?
• A protective theme that we look for as a lender is to evaluate a company’s operational flexibility. Those companies that embrace this operating thesis innately employ a protective hedge against unforeseen disruptions and vulnerabilities and thrive when others are struggling to survive.
• In preparation for unforeseen events, I cannot emphasize enough the need to have access to ample liquidity to (1) get you through operational or supply chain disruptions and (2) take advantage of opportunities that surface out of such events. Payment discounts, volume purchase discounts, M&A opportunities, JV arrangements – all require capital and resources outside of the normal working capital cycle. And not having sufficient liquidity or appropriately capitalizing your business may cause you to miss out on opportunities that have meaningful positive financial impact. 

In a situation like this, what are some important questions to consider when searching for a lender?

• Recognize that money is a commodity and every lender’s cash is just as green as the other guys. How lenders differ is how they handle disruption in a borrower’s performance.
• Regardless of what some may think, developing a relationship with your lender is of paramount importance, creating an understanding of what is important to one another. Clear communication and transparency will go a long way towards developing a true partnership.  Through this partnership, your lender will better understand your business and when unexpected events occur, will likely guide you to a more favorable response.
• When evaluating a lender, it is important to ascertain if they truly understand your business. Are they asking the right questions and are they focused on the true risk areas of the business? If you are operating in a cyclical industry, are they structuring the credit facility to provide sufficient borrowing flexibility to see you through an extended down-cycle? 

There are numerous occasions when companies have been negatively impacted by ‘non-recurring’ events such as extreme weather, labor strikes, ransomware attacks, pandemics, etc.  A capable lender should be able to isolate the financial impact of such an event, ‘normalize’ the financial performance, perform the appropriate credit analysis and structure the credit facility to meet the long-term financial needs of the company.  If they cannot see through these events, then you have the wrong lender.

John Felix has served as Managing Director of White Oak Global Advisors, LLC (WOGA) since 2017 and has been actively investing in middle market companies for more than 20 years. WOGA is a leading alternative debt manager specializing in originating and providing financing solutions to facilitate the growth, refinancing and recapitalization of small and medium enterprises. Together with its financing affiliates, WOGA provides over 20 lending products to the market, including term, asset-based and equipment loans, to all sectors of the economy. Since its inception in 2007, WOGA has deployed over $8 billion across its product lines, using a disciplined investment process that focuses on delivering risk-adjusted investment returns to investors while establishing long term partnerships with our borrowers. For more information, visit www.whiteoaksf.com.

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