The Impact of COVID-19 on Supply Chain Credit Risk
45 Pages Posted: 1 Jul 2020 Last revised: 25 Nov 2020
Date Written: July 1, 2020
We examine how supply chain activity reflects into credit risk during different phases of the COVID-19 pandemic by focusing on CDS spreads and US-China supply chain links. We find considerable effects on credit risk propagation. CDS spreads for firms with China supply chain partners increase with supply chain disruptions during the economic shutdown period of the pandemic, and the spreads go down when the economic activity resumes with re-opening in China. The household demand channel is an important driver of this supply chain credit risk behavior. Supply chain activity resumption is not sufficient to decrease credit risk in sectors that cater to households when the local economy suffers from dampened household spending due to economic shutdowns. Having a more global customer base, on the other hand, mitigates the local household demand shock effects. While firm leverage and supply chain duration magnify supply chain driven credit risk during the pandemic, cash holdings, growth opportunities, investment-grade rating, and supply chain network centrality moderate such effects.
Keywords: Supply Chains, Credit Risk, COVID-19, Pandemic
JEL Classification: E21, E51, F23, G12, G14, G23, G32, L11
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