Defaults and Restructuring Next for Retailers

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:

  • “Consumers become even more cautious and hardwired to seek discounts.”
  • Companies have only “limited success” in adapting to “shifting consumer preferences.”
  • “Subpar economic growth in many markets.”

Department stores, specialty apparel stores, and specialty retail stores are in particularly hot water, according to the report: “Without a positive development in consumer behavior during the holiday season, we assume 2016 will continue to challenge companies’ ability to meet shifting consumer preferences for value.”

But that’s the rosy scenario for 2016. The report assumes that consumer spending will grow at “about 3.3%.” Even then:

[W]e don’t think small ticket retail will be as strong as this overall consumer spending forecast might imply. Sales may rise, but margins will depend on retailers’ inventory positions and cadence of promotional activity, which we think remains intense.

The 2015 holiday season and all of 2016 will pose more downside risk than upside for companies’ credit quality. We acknowledge the windfall from low gas prices has not benefited retailers much.

Stagnant wage growth and competition for “share of wallet” from health care, technology, and “experiences” will be a headwind in 2016.

Aggressive shifts in financial policies to return capital to shareholders by investment-grade issuers is a downside risk.

And this is how S&P credit analyst Robert Schulz summarized the issue to Bloomberg: “We expect more retail defaults in 2016 than 2015 and 2014.”

This time it’s different. Now, brick-and-mortar retailers have industry-specific issues, on top of whatever overall economic issues they may face in the US.

“What looks the same but costs three times less is where everyone’s going,” Patrick Dalton, CEO of Gordon Brothers Finance Co., an asset-based lender that works with retailers, told Bloomberg. Consumer spending for “stuff” is under pressure as folks like to spend more on “experiences,” such as dining out. And then there’s the internet….

“Amazon is crushing everybody,” Dalton said. The same Amazon which operates under a different set of market expectations than any other retailer. Unlike them, Amazon isn’t struggling with its debt, and it isn’t under pressure to maximize its profit, or even have any visible profits, as long as it shows revenue growth.

But that’s not the case for others. J. Crew, burdened by $2.1 billion of debt from its 2011 LBO by TPG and Leonard Green & Partners, saw its bonds fall to 25 cents on the dollar in December, according to Bloomberg. And the 8% notes of Bon-Ton Stores, which in November had blamed the “unseasonably warm weather” and “continued weakness in overall traffic trends” for its crummy results, last traded at around 33 cents on the dollar.

Now restructuring advisors are back in business. The industry has been starving on the sidelines for years during the Fed’s great credit bubble when nearly all companies, no matter how much they were in trouble, could borrow at ludicrously low interest rates and use the proceeds to service existing debt. But that game is now petering out.

Restructuring advisors are already making money hand over fist, advising energy companies on restructuring their debts and slashing their debt burden at the expense of stockholders and many classes of creditors, with or without a bankruptcy filing. These folks are now eyeing retailers.

And they have “already started circulating names of retailers proposing various debt-renegotiation plans as bond prices continue to drop,” according to Bloomberg. Steven Ruggiero, a credit analyst at RW Pressprich, put it this way: “It’s going to be a busy year of restructuring for retailers.”

And tough times for investors in those retailers!

The overall Distress Ratio for US corporate bonds is soaring, and globally, the corporate default rate is the highest since 2009. Things are coming to a head. Read…  Global Corporate Debt is Coming Unglued

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  36 comments for “Defaults and Restructuring Next for Retailers

  1. Ptb says:

    When Amazon started offering prime, no shipping charge and two day delivery, I pretty much quit going to stores. Except for groceries, I don’t why most people would not do the same.

    • Spencer says:

      …and Costco, bought two two packs of Crest Pro-Health Multi-Protection Mouthwash 2ct / 1.5 Liter for $6.99 and free delivery, insane, no? Lost leader? Maybe, but took advantage.

    • Keith says:

      I think the reason people still go to stores has more to do about boredom and having something to do, for which they will pay out bucks, even if it means just going back later to return the items.

      It is amazing how much online shopping frees up one’s time.

    • PIGL says:

      Because I don’t want to further their evil plans?

  2. Chicken says:

    Obviously AMZN has reinvented retail but overall the experience isn’t as rewarding absent the touchy-feelie experience thus I need a much lower price to compensate for the risk AND I buy much less. Besides, times are tougher than ever since all stimulus goes into pockets of those who can’t possibly spend it all.

    Thus, I’d call AMZN one of the greatest green-tech companies on Earth, consumption by the masses is dropping rapidly, just have a look at China as poof!

  3. economicminor says:

    Just the cost in money and time of driving all over to search for something you need compared to just going on line and searching. Why drive? On line you don’t get to try in the shoes or clothes but most of us know what size we wear. UPS comes here at least twice a week and some weeks every day. I am sad our way of life has changed so much in the last couple of decades but change is the only real constant..

    I also feel sorry for anyone who put money into any of those LBO’s bonds. They should have understood the direction retail has been heading for more than a decade. Penny’s and Sears use to have good brands. Now they have none, just over priced clothes made in some place far far away.

    There will be a time when all those commercial REITs are going to also fail. No one can convince me we need all those big boxes of high priced merchandise and strip malls… malls… another great place to wait and watch the over leverage carnage. Our local one even had empty spaces during the holiday selling season. And office space? For what? Overly priced attorneys suing each other?

    Another one that makes no sense to me is the incredible amount of motel/hotel rooms created in the last 10 years.. I am sure those were all created with huge debt. Could we really have needed all those new rooms when the average income has been flat to decreasing?

    Interesting times

    • CrazyCooter says:

      Amazon and other online retailers only really work when you are buying a very well defined, if not commodity, product without expiration problems. Want a good pulled port sammich? Not on amazon. Pork shoulder? Also not on Amazon. But, if you want the canned/packed ingredients to make a great BBQ sauce (e.g. vinegar, brown sugar, ground mustard, etc) then you can get a pretty competitive price.

      So, Amazon can squeeze some products, but you still need local businesses for others, regardless. So, if a business loses margin/volume on some products, they will make it up on others. I will have my pulled pork and pork ribs on occasion – and I will be damn pissy if I can’t get it. Prices be damned.

      So, yes you can save, but my point is there is also no free lunch, because all we are doing is shifting overheads around between businesses and screwing with their volumes.

      Anyone who invests in things they do not understand deserves what they get. This is the most difficult problem I wrestle with. I lost my @** in 99 and 07 (percentage terms thank god) and learned my lesson. I will NEVER put money in ANYTHING I do not fully understand. Fully. No exceptions. I don’t even like brokerages for stocks, even if I think I can pull off a ten bagger, because I feel they are that rigged. I don’t have time to learn all the ins/outs of not being cheated according to the umpteen pages of small print in the agreements (not to mention cheating I can’t afford to prosecute). How about a fat middle finger instead?

      Do understand that most of our species is stupid. This is by design and nature is NOT without PURPOSE and DESIGN. This is how the world works, like it or not. So, the lesson here is to read, think, judge yourself against yourself (not others) and set your own goals/limits/aspirations. Competitive people don’t understand this lesson; they revel in besting someone else. I revel in besting myself – in quiet ceremony no less. Set some personal growth goals every year and try to stick to it. If you need a starter, shell out the bucks for Will Durant’s History of Civilization. All the volumes – don’t be a slacker. Read that and then pick a new goal. No one will care and there aren’t any points – but you will be vastly wiser for it.

      I have been simmering on an idea about RE for a while now, but I don’t know if it has merit. I am mostly in the “cheap money leads to overcapacity camp” but once the costs are sunk, new owners (after the BK) find a use for the capital. We may very well see the resurgence of company towns which are predicated on a corp office securing significant RE in a concentrated area and then moving major offices/plant to the center of that location, to milk their workers who have to rent from property they bought prior to the relo. REITS are a necessary mechanic for that to transpire – it is too complicated otherwise to deal with so many individual owners.

      As far as hotel space goes, productive capital is being hoarded in the very upper bands of income, at the expense of the lower bands. At some point, if things go south enough, folks with a small income will be willing to pay most of their wages to avoid homelessness. So, these hotels may very well end up being the “company housing” where folks barely get by, just off the edge of being homeless. Maybe the investors planned on those cash flows, maybe they didn’t. Railroads in the US took out many rounds of investors, but eventually they made money. Now they are solid earners, not magnificent, but at the same time you won’t go broke owning a railroad either. So, maybe investors get cleaned out, but their capital will pull cash flow – it will just be a sad tragedy of a cash flow.

      The lesson is don’t be an idiot and you can’t be an insider – so you are a bit short on odds.

      Look past the coming wreck, it has a shape afterwards. After a major market crash, the sun still will come up. The tides will still roll in and out. Anyone alive will still want to eat, stay clothed, sheltered, shag, and sip on a beer or coffee. It is the nature of our species. It will just be … darker.



      • william says:

        The last five years, I’ve been moving my wealth to local real estate and out of Wall Street. I have much more visibility and predictability on how my investments grow, as well as the risks, trends, and new opportunities. I think each RE market has profitable niches. And if you can’t find one profitable niche in a RE market, drive 30 minutes and you’ll likely spot one there (I do this in two different states.)

        • Ptb says:

          Yes. I’ve done the same thing and the stability factor is way better.

        • ML says:

          In the context of value, the perceived stability of real estate, compared with the volatility of the stock market, is just a perception.
          The main difference is that real estate pricing is not available every second whenever the market is open.

    • The Engineer says:

      Bingo! I think Amazon’s success is aided appreciably by our displeasure with driving and urban sprawl. Ironically, JC Penny’s catalog brought products to people who didn’t have our level of mobility or time to go find them.

      We need to totally reinvent our transportation system. The status quo is the source of many ailments.

  4. LG says:

    The layoffs will be massive this year! It will break the US!

  5. VegasBob says:

    An executive I know at a major luxury retailer described the holiday shopping season as ‘horrible.’

    He’s been in retail for at least 30 years, so I think he knows what he is talking about.

    Layoffs will be massive, but they will carefully hidden from public view. That is because of the part-time work economy engendered by Obamacare. Millions of people have been forced to work 2 or 3 part-time jobs to survive. If they lose one of those part-time jobs, they are still employed and are therefore frequently ineligible to file for unemployment.

    • night-train says:

      VB: Retail has been heavily dependent on part-time for at least 30 years. Almost every big name department store went from 3-4 full timers per department, supplemented by part-timers, to 1-2 full timers and more part-timers. With managers in charge of increasing numbers of departments. Today, you will probably find 1 full time salesperson for multiple departments. You are correct, of course, on the multiple part-time jobs the American worker has and will have to have.

    • chris Hauser says:

      i believe the 5% unemployment rate is correct, because there are 10% more unemployed/unemployables out there. no, it’s not 15%…….or maybe it is.

      find out what the person you hire pays their assistant, and you’ll find out they can’t pay a lot for labor either.

      jeez. am i off subject? i am. now as to over leverage in retail……yep.

  6. BoyfromTottenham says:

    Peak Shops? It seems to me here in Australia that the number of shops in every suburb selling the same stuff, or stuff few sensible people should want to buy, has been increasing for a couple of decades. Since Aussie incomes have not greatly increased since the GFC, consumer debt has reduced only a little, and many daily costs have risen, I predict that the next turn-down here will result in serious damage to traditional bricks and mortar retailing, and then to damage the REITs that rely heavily on shopping centres for revenue (think Westfield). Thankfully, this is still a GREAT place to live!

  7. David D says:

    I worked for a large retail shopping center developer as a construction manager from 2004-2009. Everything was great back then and the company was building, owning and selling malls all across the U.S. Then the great recession hit and my job went by the wayside as a direct result of the retail market tanking into the toilet. I experienced the crumbling like what seemed to be overnight. Execs in the office were talking about the 700 point drops in the Dow and I remember thinking well that’s not good but tomorrow will be business as usual again. Until that day came when it wouldn’t be business as usual any more.

    The only thing that has changed since then is massive debt fueled speculation creating an even bigger bubble than 2008. It has spread to all sectors of the economy including retail …again. In reality, we’re much worse off now. How stupid is it to make the same the mistakes again and not learn from what just transpired 7 years prior, but the there’s just plain greed. Greed from all the money Big Money has made from this monumental farce of a propped up economy.

    Greed is one of if not the biggest human flaw. It’s led to the culmination of one of the greatest Ponzi schemes the world has seen and will ever see. It’s all been a grand plan to drive hard working middle class people out into the street, retirements shredded dreams stolen away. Kicked to the curb as they continue to line their pockets at our expense. After 7 years I think a lot of people are tired of being kicked around.

    We needed to deleverage and reset back in 2008 but our fearless leaders saw a way to capitalize on the great misfortune of other “less deserving” individuals. Now the markets are saying it’s way past time for the great “reset” is upon us. The clock has finally struck 12 on Fed and Wall Street engineered “Business as Usual”.

  8. Frank says:

    Here in Australia in the last few days the third largest electrical goods retailer
    (After JB Hi Fi and Harvey Norman) has gone into receivership.A brief history goes like this Dick Smith sold his little electrical hobby stores to Woolworths for $25m in the 1980,s ,they couldn’t make a go of it and in 2012 sold it to Anchorage Capital for about $99m.
    They in turn jazzed it up made it sexy and in a public float with shares at $2.20 each the company was suddenly valued at ……wait for it. $520m.
    Shares last traded at 36 cents and then the banks folded.
    Over 3000 employees,dishonoured deposits and gift cards.
    When the original owner,Dick Smith was asked what he thought caused this to happen without hesitation he said one word GREED, enough said.look out below.

  9. ML says:

    I advise retailers on being long term successfully successful. It’s not rocket science because on the whole, science is not particularly flexible.

  10. night-train says:

    Perhaps off topic, but, how long can the seemingly insane new car buying binge run on? With so much actual unemployment, high under-employment, and even falling incomes for many, I just don’t get it. I have been thinking about buying a new vehicle, but refuse to buy in a sellers market. And does anyone have any knowledge of the late model used car market? Any thoughts appreciated.

    • MC says:

      Lately I am starting to question the number we are seeing, and for a very simple reason.
      We have not-customizable, serial license plates here, tied to the vehicle, not the owner and they have pretty much stopped growing around April-May 2015 after one year of frenzied growth. It seems somebody flicked a switch overnight.
      In the meantime nominal sales have been growing at double digit pace.
      How do manufacturer manage that? Two simple words: channel stuffing.
      Technically speaking channel stuffing is illegal in most of the world, but loopholes have been found, such as shipping the car back to the manufacturer after the delivery or pre-sale inspection found it to be “defective” or “damaged during transport”. Failing that, after six months sitting in the dealer’s lot the car gets registered and offered for sale at 40% rebate or even more. Sometimes it is exported in “as new” conditions. Dealers do not pay taxes on these cars for three years, so it costs them only the registration fee, which is often quietly paid for by the manufacturer itself to goose numbers.

      Now, channel stuffing can mask poor sales for a year, at most eighteen months, after the whole scheme blows up because those stocks reach a level where they just need to be liquidated.

      There’s also another twist in the story. If you want a car that’s on the dealer’s lot, zero problems, but try buying something different.
      My brother bought a new BMW a few months back. He wanted a color the dealer had not in stock but not a fancy one-off model. Just a different color. Five month wait.
      Late last year I fancied to buy a new motorcycle, so I went to my friendly BMW dealership, which is one of the largest in the country. Of course the model I was interested in was not available. I was quoted at a four and a half months wait, minimum. But if I wanted another one, I could have it in the time it took to have it registered.

      Why manufacturers do this? Simple: they push the models/trim level/color that’s cheaper for them to manufacture and upon which they have the most margin.

      • chris Hauser says:

        excellent post. yes, channel stuffing.

        every other tv commercial is for autos.

    • Curious Cat says:

      I have read recently that about 20% of new car loans now fall into the category of “subprime”. Sound familiar? The shakeout in autos won’t be as severe as in housing, but still….

    • prepalaw says:

      With the exception of my 2009 GMC 1500 Sierra truck, my other cars (MBs) were purchased used (2 years old and less than 21,000 miles). I pay cash and drive my vehicles until they are charity-give away material. The car prices are too high now, especially for low mileage, used cars. I bought the truck in 12/09, when a GMC dealer was unloading 60 or so identical new trucks that no one wanted (crank windows; mechanical locks; rubber floor; few electronics; small V-8. The dealer practically gave the thing to me.

      If you can hang on your existing rig for another 18 months or so, I think you will be able to then make a much better deal. If you can not hang on, then compute the cost to lease, for 2 years, a used car that you would normally purchase. With a purchase price option at the end of the lease. That allows you to walk away from the rig and also walk away from your investment (lease payments).

      And/or, go to a good, reliable mechanic and have him tell you how much you will have to put into your existing rig to keep it going for another 2 years. Then, figure out what is best for you.

      To make a good deal on a used car, you have to be willing to travel as much as 500 miles from home to get the rig you want in the best condition and for the cheapest price. Those are usually all cash deals. There is a lot of research involved and much haggling. Good luck.

      • night-train says:

        Thanks for the information. Some good stuff there. I have been putting off beginning the process of kicking tires, but guess it is time. Thanks for wishing me luck. I know I will need it.

    • Petunia says:


      Having fallen out of the middle class and having to deal with the economy, such as it is, has given me some insight into your question. The new car sales are based in large part in lower income people having more access to the credit market at lower rates. This is totally a function of their credit scores having “improved”. Almost everybody with a job has a new car in South Florida.

      Trading in an old car with a high interest rate and outstanding balance is now possible, because we are all better credit risks. Even with the outstanding balance rolled into the new loan the better interest rate makes it possible to afford the new car. You can trade in an old clunker and walk away with a new car for less then your last monthly payment. The terms are for much longer but the poor are use to not owning anything outright anyway.

      • night-train says:

        Petunia: I have made similar observations in my area. Our mass transit is sadly lacking, so if one works, one needs a car. And when one isn’t living high on the hog, one has to make paying for their car fit into their budget. Not what a financial advisor would espouse, but there is a big divide between managing wealth and getting by. And a lot more around here doing the latter rather than the former.

  11. william says:

    JCP, RDEN, AVP are stocks I’m shorting because their bond prices are tanking. Conns is a regional chain that’s decided to embrace debt and finance buyers with terrible credit.

  12. Uncle Frank says:

    Why is Sears still open in my local mall when I see only a few people ever shopping in there?

    • Wolf Richter says:

      Good question. I’ve been wondering about that for years!

      The other thing I’ve been wondering about: why is ANYBODY still shopping there?

      • Petunia says:

        The big corporate home owners in South Florida buy all their appliances from them. Remember there are tens of thousands of these houses with new appliances.

        Also, they are the only ones who sell the vacuum bags for my old hoover.

      • Ptb says:

        Word is that Sears has only a few months left.

      • chris Hauser says:

        i’m of the opinion most everything in there is on consignment.

        my theory is they will be the new local warehouses for internet-delivery.

        or perhaps where you take your ration card.

        a fun read: the midas plague.

  13. LG says:

    I’ve heard the gov offers a “kick back” to large corporations like Sears, Home Depot, Costco etc. long as they keep hiring even if it makes no financial sense.
    They have to hire college students and semi retired to qualify for the
    “kick backs “

  14. TheDona says:

    No surprise retail is down. What compelling items do the big box Retailers have to offer…quality is horrendous and offerings are not regionally specific. In the race to cut costs as much as possible to please the hedge fund owners, the better name brands I would normally buy seasonally are now of the same cheap material and workmanship as the fast fashion crap. So, NO, I will never buy that brand again. My adult daughters and I buy a few quality items each season and that is it. We want all leather shoes,purses, belts, and natural materials clothes that hold up to more than one washing or dry cleaning without all the buttons falling off, the seams shifting around or actually coming unraveled…not to mention fading and major shrinking….throw away stuff. Living in Texas, cotton is the preferred material pretty much year round: keeps you cool(er) in our brutal summers and you can layer in our milder Winters. So no, we are not going to buy all this “trending” synthetic junk. The stores need to pick a market share they want to go after and satisfy that demand. Trying to be everything to everybody all over the US is not working. Blaming the mild winter for slow sales is such a cop out as our weather here and in much of the Southwest does not require a new coat, scarf, boots every year. In fact there are some years we don’t need a coat at all. In the same vein, our warmer weather requires a longer sales season for spring/summer goods. We still need replacement Tees and bathing suits in August…not sweaters! We would spend money if offered what we actually need. If these brands/stores say sales are falling because everyone is not buying a new coat each year then they better be prepared to become extinct.

    Regarding the so called luxury brands (MK, Coach,Tory Burch): please take the hideous logos off of them. We might as well be wearing a huge gold chain with a Mercedes hood ornament attached.

    Offer quality goods for individual regional needs and we will pay more to purchase. As it stands now there is nothing to buy.

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