The Impact of COVID-19 on Supply Chain Credit Risk

Abstract

Global supply chains expose firms to multi-regional risks while also providing a buffer against local shocks. The recent COVID-19 pandemic and its differential impact on different regions in the world provide an opportunity to explore these effects. We examine multi-regional supply chain risk by focusing on credit risk as measured by CDS spreads and US-China supply chain networks. We find that local risks propagate through global supply chains to other regions. CDS spreads for firms with Chinese supply chain partners increase by 8-9 percent due to supply chain disruptions during the pandemic-related economic shutdown period in China, and the spreads decrease by 12-20 percent when the supply chain activities resume during the economic re-opening period. The household demand channel plays an important role in this risk propagation. We find that supply chain activity resumption is insufficient to decrease credit risk in sectors that cater to local households when the local economy suffers from dampened household spending due to economic shutdowns. Having a more global customer base mitigates the local household demand shock effects. Firm leverage and supply chain duration weaken supply chain resilience as reflected in credit risk during the pandemic, whereas supply chain network centrality, cash holdings, growth opportunities, and strong credit ratings increase resilience in global supply chains.