A lot of the retail business is in a shaky state right now. A number of companies are propped up with risky, leveraged loans, leaving them vulnerable to default in the form of missed payments, forced debt restructuring, or even bankruptcy, all of which can lead to trouble with financing in the future.
In April of last year, defaults by retailers reached a record high. The outlook for 2019 isn’t much better. “We are forecasting a 7% retail default rate, which would be above the 4.7% mark reached at the end of 2018 but below the peak 8.7% level seen in April 2018,” says Eric Rosenthal, senior director at the credit ratings firm Fitch Ratings. As the retail industry publication Chainstore Age reports, this forecast is well above Fitch’s 1.5% estimated default rate for the leveraged loan market overall.
In December, retailers led Fitch’s monthly list of the “top loans of concern.” The factors that can land a company on the list include low ratings, loans that trade at a discount to par, events that signal trouble such as the hiring of a restructuring attorney, and input from Fitch analysts. Of the total volume of outstanding debt on the December list, retail accounted for 18.6%, more than any other industry.
Most of that had to do with one company: Neiman Marcus, which has a $2.8 billion loan coming due in 2020. David Silverman, a retail analyst at Fitch, says that even though Neiman Marcus is set up for “long-term viability,” it will likely have to restructure its debt in the next year.
Neiman Marcus said in a statement to Quartz: “In December, the company reported its fifth consecutive quarter of positive comparable sales growth, all Neiman Marcus Group stores are EBITDA positive, and adjusted EBITDA increased 10.6% from the same quarter last year. The company has $620 million in liquidity and ample runway to refinance its debt with no near-term maturities.”
Remove Neiman Marcus from the list and retail’s share of the outstanding debt on the “top loans of concern” list drops to about 5%, though Fitch’s Rosenthal points out that “there are a few sizable names on our Tier 2 Loans of Concern list that bear watching.” The tier 2 list considers the same factors, except the companies on it have more financial flexibility, greater liquidity options, or “potentially more tenable capital structures,” Fitch says. Companies on that list include Academy Sports & Outdoors, which has struggled like other big sports retailers, and J.Crew, the long-beleaguered and debt-saddled fashion chain.
Several companies on both lists have faced problems for some time now. The retail industry as a whole is in transition, and not every business has adapted. When another ratings firm, Moody’s Investors Service, issued a report in April calling out the all-time high in retail defaults, the culprits it cited included the “fallout of changing consumer behavior and advancing e-commerce for traditional brick-and-mortar retail.” Just look at Sears, once America’s largest retailer. It declared bankruptcy in October, and may soon cease to exist after more than a century in operation.