Transportation ABS strong amid supply chain, labor issues

Trucking fleets are experiencing heightened demand pressure from ongoing global supply chain issues, US inland transportation backlogs and labor issues. However, trucking fleet operators’ financial health remains resilient, leading to low default rates and stable transportation-backed ABS performance, Fitch Ratings says. Furthermore, limited supply of Class 8 heavy duty trucks and trailers (chassis) cause increased asset values, driving up recovery rates within ABS transactions.

The increase in goods demand as a result of the economic recovery has overwhelmed trucking fleet capacity, and global supply chain issues exacerbated existing labor shortages. Consequently, operators are increasing wages to attract and retain drivers, which could erode margins.

Inability to meet shipping demands will limit overall fleet gross profits and could drag on obligor credit quality. However, fleet operators are able to charge higher freight/shipping rates to partially offset restricted capacity and labor constraints in the near term but if these constraints are prolonged it could negatively affect operator growth in the long term.

Fleets may not be able to accept loads due to driver shortages and too few chassis. Empty containers are building up at ports in the rush to return them to manufacturers in Asia, and the lack of space means that trucks are often unable to drop off containers at terminals. Containers loitering on chassis tie up the trailers for use elsewhere, aggravating the logjam and adding upward pressure on freight rates.

Additionally, the trucking industry itself has been subject to disruptions to the delivery of new models and equipment. Used truck and chassis values are increasing as a result, leading to higher recovery rates, a credit positive for existing transportation equipment ABS. Overall, transportation ABS performance has improved, with delinquencies and net losses at or below pre-pandemic levels. In fact, most Fitch-rated ABS trusts are experiencing negative net losses due to robust recovery rates.

Freight volumes and rates are still near all-time highs. According to DAT Freight & Analytics’ Nov. 16 Trendlines Report, current national van rate averages are at $2.93 per mile, an $0.08 increase from October’s average. DAT reports the current national load-to-truck ratio is 4.47 loads to truck, compared with the Oct. 24 average of 5.17.

Shipping backlogs should begin to work themselves out in 1H22, alleviating pressures on transportation demand and rates, although goods demand will likely remain robust as the economy continues to recover. ABS ratings, which already incorporate default and recovery rate stresses, are expected to be remain stable. Recovery rates are expected to return to historical levels as supply chain issues temper and inventory levels normalize.