The Context
In the light of recent events; the demise of Silicon Valley Bank and Credit Suisse; legacy data indicates that the American Cold Chain Industry has a sizeable exposure to the failed banks. Furthermore, it is only logical to deduce that many other regional banks (that are on the brink of collapsing) are active lenders to the key cold chain players.
The extent of Cold Chain Industry’s exposure to overleveraged financing, evidently reflects in the Pitchbook 2021 report. It claims that Silicon Valley Bank has provided more than $2.8 billion in venture debt financing to logistics and transportation companies, including many known American cold chain companies like Cold Chain Technologies that secured a $10 million revolving credit facility from Silicon Valley Bank in 2019 (Press Release). The report also mentions Lineage Logistics, one of the largest provider of transportation and warehousing services for temperature controlled logistics. Lineage has secured loans from Silicon Valley bank in the past and in 2019, the firm received USD 500 million from Credit Suisse.
Pelican Bio Thermal, provider of temperature controlled packaging solutions for the pharmaceutical and life sciences industry, in its press release, revealed that it has secured $30 million credit facility from Credit Suisse in 2019. The Pitchbook data also shows that Pelican Bio has procured financing agreements with SVB in the past.
Can overleveraged banking sector alter the Cold Chain Sector ‘s Outlook?
Most likely, yes. The failure of banks that heavily lend to the cold chain industry can have a significant impact on the industry’s growth and development. A clear precedent of this phenomena is seen in the April 2021 event: The bankruptcy of Greensill Capital, a specialty finance company that provided supply chain financing to several cold chain companies. It’s fallout has caused visible disruption and uncertainty in the industry.
Greensill Capital provided supply chain financing to several American cold chain companies through mutual finance agreements; some of which include Americold Realty Trust ($350 million), Agro Merchants Group ($30 million) and Lineage Logistics ($700 million). All the said multi-million dollar contracts were terminated after the bank’s collapse. The bankruptcy has caused disruption and uncertainty in the cold chain industry, and it remains to be seen what the long-term impact will be.
It’s important to note that while all the above mentioned companies may have had exposure to Greensill Capital, #SVB and Credit Suisse, they have diversified financing sources and are still operational.
Why do banks default on their payments?
If one was to fully trust the fundamentals of economics, banking seems almost noble and banal at the same time. What’s the big deal in running a bank? Simply extrapolate the supply and demand figures to the interest rates and make sure that while you increase your market share amongst borrowers’; you remain profitable.
Profitable? Unless you missed out a small detail called Risk Management.
Retail banks operate in a competitive market where the demand for loans and other financial products is driven by the needs and preferences of consumers. Interest rates are a key factor in retail banking operations, as they determine the cost of borrowing for consumers and the profitability of lending for banks. They must carefully manage their capital structure to ensure they have sufficient capital to meet regulatory requirements and withstand economic shocks. Banks must balance their use of equity and debt financing to maintain financial stability, but ensure to constantly steer away from the overleveraged zone and follow risk management principles.
In simple economic terms, when Banks receive an X total deposit amount from a Y number of customers; for some reasons, they assume that all Ys will never retrieve the full deposits i.e. X, at any given time. Therefore, with guilt free cheek and under the influence of capitalistic wisdom, they overleverage their borrowings in hope of higher earnings. On the day of the reckoning, when all of Y comes calling for all of X, the bank defaults due to its inability to pay all depositors. Simply because the deposits are over invested in bonds and other instruments that are now in total, less than the deposits itself. The failure of banks to honor all withdrawal request of its account holders leads to a default and an ultimate collapse.
A recent example of overleveraged financing can be seen in the collapse of the Washington based Signature Bank. The media induced panic led to its depositors withdrawing over $10 Billion in a go, leading to the bank’s eventual demise.
Why is this bad for cold chain industry players and consumers?
In the short term, a fall out in the banking system limits the availability of financing for new projects and expansions, leading to slower growth and a lack of investment in technological advancements. The result of this may very well be decreased efficiency and increased costs for companies in the cold chain industry. This will ultimately be passed down to consumers and may have a significant impact on the projected growth figures of Cold Chain Industry in America.
Cold chain as an industry is capital intensive. It heavily relies on financing from banks. The exposure of banks like Silicon Valley Bank and Credit Suisse to the cold chain industry puts the industry at risk in case of bank failures. This invariably leads to disruption, uncertainty, and decreased efficiency in the industry, which may have a long-term impact on the quality and safety of perishable products.
The banking crisis in the USA can have significant implications for the pharmaceutical cold chain and air freight industry, both of which rely heavily on financing from banks.
The pharmaceutical cold chain industry which is responsible for transporting and storing temperature-sensitive pharmaceuticals, vaccines, and biologics, relies on specialized active and Passive Cold Chain Systems, such as refrigerated trucks, temperature-controlled warehouses, and thermal pallet shippers, which can be costly to purchase and maintain. Therefore, the industry heavily relies on financing from banks to fund capital expenditures and expansion projects.
The air freight industry is also critical to the pharmaceutical cold chain as it provides fast and efficient transportation of temperature sensitive products over long distances. The industry has seen significant growth in recent years, driven by increasing demand for pharmaceutical products worldwide. However, the aviation sector is also capital-intensive, and needs regular financing from banks to purchase aircraft and invest in technology and infrastructure.
As banks may become more cautious about lending to the pharmaceutical cold chain and air freight industry, it will result in reduced availability of financing for new projects and expansions. The ripple effect of such a scenario may be a slower growth and a lack of investment in technological advancements, causing decreased efficiency and increased costs for cold chain companies and consumers in America.
Here’s some more evidence…
Deloitte, a leading think tank in America published a report in 2020, titled “Cold Chain Logistics: Trends, Challenges and Solutions”. The report was well received and hailed by the industry as a valid indicator of double digit growth projections and rising industry size. One key finding of the report is that “the cold chain market is growing rapidly and is expected to reach $447.5 billion by 2025.”
In terms of the perishables industry, the report notes that “consumer preferences are shifting towards fresh and organic produce, which requires proper cold chain management to ensure safety and quality.” The report highlights the case studies of Walmart, implementing a block chain-based system for tracking the supply chain of its leafy greens, and of Amazon acquiring a refrigerated trucking company to improve its last-mile delivery capabilities.
In the American pharmaceuticals industry, the report notes that “increasing demand for temperature-sensitive drugs and biologics is driving the need for effective cold chain management.” The report highlights companies like AmerisourceBergen and McKesson, which are investing in technology and infrastructure to improve their cold chain capabilities. For example, AmerisourceBergen has implemented a centralized monitoring system for its cold chain shipments, while McKesson has invested in temperature controlled packaging to improve the safety and efficacy of its cold chain shipments.
The thinktank Deloitte reports that “There is a need for creative financing solutions that can enable cold chain companies to invest in the necessary infrastructure and technology without compromising their balance sheets.”
However, the report also highlights several challenges facing the industry, including the need for investment in infrastructure and technology, regulatory compliance, and the impact of climate change on supply chain resiliency. In terms of financing, the report notes that “access to capital is critical to support the necessary investment in infrastructure and technology to meet the evolving needs of temperature-controlled logistics.
The Deloitte document cites case studies of several companies in the cold chain industry, highlighting their approaches to addressing these challenges. For example, the report describes how one company “invested in a transportation management system that allowed for real-time visibility of shipments, enabling more effective supply chain management and increased customer satisfaction.“
Passive Cold Chain Solutions such as Thermal Insulated packaging Products are a great way to achieve a true low landing cost and to reduce your total cost of ownership.
The Unidentified Uncertainty remains…
Adding to this woeful environ is the cyclical inflation. Experts are now claiming that bank failures in America may not be an unexpected result but a logical and planned outcome of the loose fiscal policy. With due credit to the American FED; almost every sovereign economy adopted it not because they needed it but because they could. Of course! “Global pandemic” was the perfect storm and an excuse. While the easy money amply gratified the secondary markets; it is now the hardest thing to find (pun intended).
It is pretty safe to say that like all industries, Cold Chain Industry in the USA too, faces a lending crunch and a growth laggard; lest you habitually focus on positive unit economics, creative innovation and client relations.
The cold chain industry is essential for maintaining the quality and safety of perishable products, such as food and pharmaceuticals, during transportation and storage. As an industry that is rightly deemed as “Fit for Future”, it needs to repurpose innovation and product development that is sustainable and hybrid.
Article Resources:
- Deloitte. (2020). Cold chain trends: Opportunities and challenges in an evolving market
- Pelican BioThermal Secures $30M in Funding for Growth Initiatives” (Press Release). Pelican BioThermal. February 23, 2021. Retrieved from https://pelicanbiothermal.com/pelican-biothermal-secures-30m-in-funding-for-growth-initiatives/
- “Lineage Logistics Closes $700 Million Equity Investment Led by Stonepeak Infrastructure Partners and D1 Capital Partners” (Press Release). Lineage Logistics. July 30, 2019. Retrieved from https://www.lineagelogistics.com/about-us/news/lineage-logistics-closes-700-million-equity-investment-led-by-stonepeak-infrastructure-partners-and-d1-capital-partners
- “Cold Chain Technologies Receives Significant Investment to Accelerate Growth” (Press Release). Cold Chain Technologies. November 6, 2019. Retrieved from https://www.coldchaintech.com/cold-chain-technologies-receives-significant-investment-to-accelerate-growth/
- “Greensill’s Collapse Exposes Food Supply Chain Risk” (News Article). Bloomberg. March 10, 2021.
- https://www.cnbc.com/2023/03/13/signature-bank-third-biggest-bank-failure-in-us-history.html
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