It’s getting tough for our over-indebted, junk-rated LBO queens.
As so many times, there’s a private equity angle to it: the cycle of LBOs, debts, and defaults.
Many retailers are over-indebted, junk-rated LBO queens, some dating from the LBO boom that ended so spectacularly in 2008: luxury chain Neiman Marcus, supermarket chain Albertsons, J. Crew Group, 99 Cents Only Stores, Bon-Ton Stores, jewelry and accessory retailer Claire Stores….
They’re now bogged down in the current brick-and-mortar retail quagmire. Strip away booming auto sales and soaring internet sales: the rest of retail is tough. And many of these retailers are trying to balance precariously above their heads the pile of debt thrown at them over the years by their private equity owners.
The vast majority of retailers are junk-rated, with the ‘B’ category dominating the rating scale, according to S&P Capital IQ Global Credit’s retail report.
It was already tough last year: of the Standard & Poor’s rated US retailers, 11 defaulted – the most since crisis-year 2009. And for 2016, we already have this to look forward to: 24 S&P-rated retail and restaurant bond issues (which S&P lumps together) have plunged so much that they’re now trading at ‘distressed levels’ and are included in the Standard & Poor’s Distress Ratio.
The ratio (more, including the chart here) is the proportion of junk-rated bonds with yields that exceed Treasury yields by at least 10 percentage points. This category of retailers and restaurants is now in third place in the Distress Ratio, behind the doom-and-gloom categories of ‘Energy’ and ‘Metals, Mining, and Steel.’
So 2016 is going to be even tougher for retailers. And it might drag out. Thanks to refinancings at the tail end of the great credit bubble when everything was possible, and thanks to the still low interest rate environment, liquidity is ‘adequate’ for many retailers for 2016. But the report sees a number of risks beyond liquidity this year, among them:
This post was published at Wolf Street by Wolf Richter ‘ January 6, 2016.