More Distressed, Leveraged Retailers Pose Risks for Commercial Creditors

A large number of U.S. retailers have slipped to the lowest and distressed tier of credit ratings—the number has tripled over the past six years to the highest level since the Great Recession—while more companies across all industries are in similar circumstances.

"Moody's-rated U.S. retailers rated Caa or Ca today make up just over 13% of our total rated retail portfolio, which is the highest level since the Great Recession, when this group comprised 16% of the portfolio," said Moody's Vice President Charlie O'Shea. "And the increase comes at the same time as the broader universe of Caa-rated companies is likewise growing."

During a lengthy period of low interest rates and “cheap money,” a new pool of B2- or B3-rated firms is created that have little room to spare from falling into the lowest rating tier, O’Shea said. “Among companies, Claire's, J.Crew, Tops and rue21 have all been hamstrung with weak credit metrics after taking on high levels of debt to fund acquisitions.”

As the same time that retailers’ credit ratings are slipping, debt maturities are on the rise, Moody’s said. Nineteen retail firms rated Caa/Ca by Moody’s owe approximately $5 billion in debt through 2021, with about 40% of this due by the end of 2018. “While the credit markets remain open to companies up and down the rating spectrum, that could change abruptly if investor sentiment turns,” Moody’s analysts said. “Among other considerations, interest rates have begun to trend upward, while U.S. speculative-grade companies have a record $1 trillion of debt coming due in the next five years, which could make refinancing much more difficult for distressed names.”

This group of struggling retailers also poses risks for more stable firms as they take more desperate measures to survive, “including highly promotional pricing that can border on irrational,” O’Shea said. The stronger companies then have to decide whether to match lower prices or relinquish sales. “And as companies under stress continue their downward spiral, liquidation and going-out-of-business sales inevitably follow, putting even more pricing pressure on their healthier competitors.”

– Nicholas Stern, senior editor

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