Defaults of Retailers Hit “All-Time High” in Q1: Moody’s

Brick-and-Mortar Meltdown sets sad record. And Q2 starts out on the right foot.

These are retailers that are large enough to be rated by Moody’s and other ratings agencies. These are not small retailers but corporations that make up the core of the Brick-and-Mortar Meltdown. Among those that Moody’s rates, there were nine defaults in the first quarter, an “all-time high,” as Moody’s put it, “reflecting the fallout of changing consumer behavior and advancing e-commerce for traditional brick-and-mortar retail.”

These nine retailer defaults accounted for nearly one-third of the 28 total corporate defaults in Q1, which was up 22% from Q1 last year. The oil-and-gas sector – despite the idea that the oil bust is over – was in second place, with five defaults.

This “recent stream of defaults” pushed the default rate of junk-rated bonds in the US to 3.9% for the trailing 12-month period ended in March, up from 3.4% in December. And the default rate of junk-rated “leveraged loans” – loans that are traded like securities or that are packaged into Collateralized Loan Obligations – rose to 2.6% in Q1, up from 2.4% in Q4.

Not all defaults lead to bankruptcy. In some cases, these retailers were able to come to an agreement with their creditors and restructure their debts without going through bankruptcy court, as the threat of bankruptcy motivates the creditors to negotiate. This type of debt restructuring can be considered a “distressed exchange” of debt, and thus a default on the terms of the original debt.

The nine retailer defaults include:

Sears Holdings, which is trying to stave off bankruptcy for as long as possible even as sales are collapsing toward zero, refinanced $500 million in old debt with new debt that pushed out debt maturities and reduced its interest burden. Moody’s determined that this was a “distressed exchange” of debt, and thus a default.

Claire’s Stores, which filed for Chapter 11 bankruptcy on March 19, defaulted on $1.9 billion in debt, “after struggling with persistent weak performance because of declining mall traffic and an increasingly competitive retail landscape,” Moody’s said. Claire’s Stores is another failed leveraged buyout of a retailer during the LBO boom before the Financial Crisis, this one by private equity firm Apollo Global Management.

Bon-Ton Stores, which filed for Chapter 11 bankruptcy in February, had tried but failed to talk its creditors into restructuring its nearly $1 billion in debt. Two mall owners are bidding in bankruptcy court on the department store chain: Namdar Realty Group and mall REIT Washington Prime Group, whose shares have plunged over 50% since August 2016. If that fails, Bon-Ton stores faces liquidation.

Two holding companies that control Tops Markets, which filed for Chapter 11 bankruptcy in February. The supermarket chain with 170 stores in New York, Pennsylvania, and Vermont, has $1.2 billion in debt.

BI-LO LLC and BI-LO Holding Finance defaulted after BI-LO’s owner Southeastern Grocers, which is also the parent of Winn-Dixie, filed for Chapter 11 bankruptcy in March

Charlotte Russe, a women’s clothing retailer, completed restructuring of nearly $230 million of its debt in an exchange that Moody’s determined was a “distressed exchange.”

And the second quarter started out on the right foot.

Fitch’s trailing 12-month institutional loan default rate of retailers was pushed to 8.6%, with $5.9 billion in loans that are now in default, after the bankruptcy on Friday of Nine West Holdings with $1.6 billion in loans. Nine West Holdings – which owns a number of brands, including Nine West, Anne Klein, Gloria Vanderbilt, and Bandolino – is one of the retailers in the portfolio of private equity firm Sycamore Partners. The company has reached a restructuring agreement with a majority of its creditors before it filed for bankruptcy (“prepackaged” bankruptcy) that included the sale of Bandolino to Authentic Brands Group.

Fitch expects other large retailers to default this year, including:

  • Sears Holdings
  • Neiman Marcus
  • FULLBEAUTY Brands
  • David’s Bridal
  • TOMS Shoes
  • Indra Holdings
  • Everest Holdings
  • Things Remembered
  • NYDJ Apparel
  • Vince.

So this process of the brick-and-mortar meltdown that has already caused so much pain among employees, pension beneficiaries, creditors of all kinds, shareholders, mall owners, shoppers, and other stakeholders is far from over.

The liquidation of Toys “R” Us sheds some light on the value of retail properties, whose value in some cases may be “little or nothing.” Read…  What Are Zombie Retail Stores Really Worth: Answers Emerge 
 

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  29 comments for “Defaults of Retailers Hit “All-Time High” in Q1: Moody’s

  1. Nick Kelly
    Apr 10, 2018 at 3:22 pm

    Neiman Marcus. Wow. I’ve never been in one, being a hick not a hip, but I thought that was a high- end name with sort of a moat to protect it from mundane cares. Where the one percenters shopped.

    • Harrold
      Apr 10, 2018 at 4:57 pm

      Neiman’s got loaded up on debt twice!

      Ares Management LLC bought Neiman Marcus in a highly leveraged $6 billion deal in 2013.

      It was also taken private in a leveraged deal by TPG back in 2005.

    • Scott
      Apr 10, 2018 at 7:03 pm

      Neiman Marcus is another Private Equity success story, which seems to be a trend among the retailers in default.

    • Apr 10, 2018 at 7:15 pm

      Yes, PE-firm owned Neiman Marcus has been on my brick & mortar meltdown list since before it was even a list and before I’d even coined the term — since December 2015:

      https://wolfstreet.com/2015/12/22/ipo-window-suddenly-closes-worst-year-since-2009-worst-december-since-2008/

      It has cropped up in many of my articles since then:

      https://wolfstreet.com/page/1/?s=neiman+marcus

      A year ago, on April 24, 2017, for example, it showed up once again in one of my brick & mortar meltdown summary articles. I wrote this:

      “Neiman Marcus, the luxury retailer with 42 stores around the country and two Bergdorf Goodman stores in Manhattan, announced that, in order to preserve cash, it would not pay interest on a bond issue in cash, but “in kind.” The payment-in-kind (PIK) option had been written into the bond covenant. At the time, creditors didn’t care. Now they’ll get the coupon on these $600 million in 8.75% notes for the next six months in form of more bonds of uncertain value. The already beaten-down notes traded at 56.7 cents on the dollar.

      “On March 3, sources told Reuters that Neiman Marcus has hired investment bank Lazard Ltd to help restructuring its nearly $5 billion in debt though it was, these sources insisted, in no immediate risk of bankruptcy.

      “The company was acquired by private equity firms in a leveraged buyout before the Financial Crisis and is now owned by Ares Management and the Canada Pension Plan Investment Board. They were going to dump it into the public’s lap, but the IPO was scrapped when the problems could no longer be hidden.

      https://wolfstreet.com/2017/04/24/brick-and-mortar-retail-bankruptcies-2017/

      • Gibbon1
        Apr 11, 2018 at 12:14 am

        > luxury retailer with 42 stores around the country and two Bergdorf Goodman stores in Manhattan
        > nearly $5 billion in debt

        Wait what a lux retailer with 43 stores has $5 billion in debt?

        Just now I was reading in the paper a bunch of bitching that California’s High Speed Rail project might cost $100 billion all said and done. And yet we have here a tiny retail chain with $5 billion in worthless debt?

        WTF?

        • Ian
          Apr 11, 2018 at 1:40 am

          WTF indeed. And the CEO will be on crazy money and will walk away with a golden handshake. If we ordinary mortals made such a monumental cock up of our job we would walk the plank.

  2. James Levy
    Apr 10, 2018 at 3:53 pm

    And yet the stock market is back on the rise.

    I’m not sure if this is allowed, but the following article may be of interest to ladies and gentlemen around here:

    https://newleftreview.org/II/55/peter-gowan-crisis-in-the-heartland

    Gowan, and now Adam Tooze, are arguing that our quaint notions about the relationship between finance capital (Wall Street) and “main street” are simply obsolete: the real money is in the financial sector, and it became unglued from the “real economy” decades ago. That’s why the 2007-9 crisis was such a big deal. It was centered in the financial economy, not the “real” one. The comparison is between the dot com meltdown and the CDO meltdown. The former just led to many companies going bust and lots of investors getting burned for billions. The later hit at the underlying collateral of an overleveraged global financial capitalism. The postmodern capitalist system can weather loads of companies going under, people losing their jobs, and investors getting fleeced. It can’t even operate if there is a threat to liquidity. Production is ancillary to those with the most money and power. Access to capital is KING.

    • Gibbon1
      Apr 11, 2018 at 1:17 am

      > But bonds have a clearly identifiable source, in an economic operator whose credit-worthiness and cash-flow capacities can be assessed; they also have clear prices in the secondary bond markets. The products bundled in cdos, however, came from hundreds of thousands of unidentifiable sources, whose credit-worthiness and cash-flow capacity was not known

      I like this part. Instead of a bond where an ordinary investor can make some qualified assessment of how risky it is[1], possibly though back channels, CDO’s are totally opaque.

      [1] Even a block of a few hundred mortgages you could easily do a soft pull on each debtor. 500 mortgages -> $100 million, looking at the financials of each and everyone of those, just a couple of grand. A CDO? Good luck.

    • Robert
      Apr 12, 2018 at 11:04 am

      If you think the Dow and S&P are on a tear, you should see the Caracas Stock Exchange- it has vastly outperformed all others in nominal terms- which proves that creation of massive debt is also reflected in the stock market regardless of the true health of the underlying economy. Remember: every single dollar of new national debt is counted as an additional dollar’s worth of GDP.
      Obviously, this is highly inflationary (you don’t have to tell the Venezuelans that, but lying about it is standard operations procedure at every single MSM outlet, so it is worth repeating: during the Weimar Republic Year 1923, you could say the GDP was doubling daily)

      • Robert
        Apr 13, 2018 at 6:45 am

        Caracas exchange up a mere 25% April 12, 2018.

        • Apr 13, 2018 at 8:00 am

          When a currency goes to heck, everything denominated in that currency goes to heck.

          The Caracas stock exchange is at best a measure of how fast the currency is going to heck.

  3. OutLookingIn
    Apr 10, 2018 at 4:03 pm

    “Not all defaults lead to bankruptcy”.

    Latest stats for for chapter 11 bankruptcies show a spike of 63% year-over-year in March with 770 filings.
    Not to be over looked is the increase in the the number of people counted as not being in the labor force at 323,000. Total now being 95 million.
    Fundamentals such as these gloomy statistics just keep on coming.

    http://www.peakprosperity.com/blog/113900/turning-point

  4. Cossu
    Apr 10, 2018 at 4:13 pm

    https://www.elitetraveler.com/features/neiman-marcus-unveils-250000-sq-ft-flagship-anchoring-hudson-yards-in-new-york-city

    https://nypost.com/2017/09/14/neiman-marcus-is-shrinking-the-store-its-building-in-manhattan/

    The Hudson yards, “the biggest private real estate development in the history of the country” will not doubt suffer from the shrinking of the anchor store of their shopping center, the core of the HY esplanade.

    • Ray Cornwall
      Apr 10, 2018 at 9:28 pm

      Well, Pfizer just announced that they’re moving their headquarters there. That can’t hurt.

  5. Tamara
    Apr 10, 2018 at 4:16 pm

    Now that 78 percent of US workers are living paycheck-to-paycheck (2017 Harris Poll), and some U.S. private equity firms doing their best to emulate General William Tecumseh Sherman’s “scorched earth” policy, along with the U.S. Government’s insatiable appetite for more debt and more war, what could possibly go wrong? But if something does go wrong, always remember this, the Federal Reserve, which is neither ‘Federal’, nor has any “real” reserves, always has your back. Kind of gives you a warm and fuzzy feeling, doesn’t it?

    “We believe the effect of the troubles in the subprime sector on the broader housing market will be limited and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system,” Fed Chairman Ben Bernanke, May 17, 2007.

    • OutLookingIn
      Apr 10, 2018 at 5:24 pm

      Tamara – A link for;

      Some food for thought re: “scorched earth”.

      http://www.econimica.blogspot.ca/2018/03/ultimate-indicator-shows-us-never.html

    • Gibbon1
      Apr 11, 2018 at 12:26 am

      > U.S. Government’s insatiable appetite for more debt and more war

      Finance, war, extortion oops I mean ‘health care’ are the top three ‘industries’ in the US. Before 2007 housing was a big sector, now that’s gone.

  6. Hirsute
    Apr 10, 2018 at 6:01 pm

    Wolf,

    I suggest that we gather forces and get into the boardroom of Neiman Marcus (or any of these distressed retailers) and sell them on the idea of an ICO. Worst case, the board could sell into the monster rally that would ensue once we announced the ICO. You have my e-mail…..

    • Tom T
      Apr 11, 2018 at 12:34 am

      Hirsute,

      Might I suggest a name for the coin? “narcisscoin”

  7. Apr 10, 2018 at 7:20 pm

    Didn’t Overstock try that? They started hyping their ICO and then the SEC started investigating. Shares have since crashed 56% :-]

    • Hirsute
      Apr 11, 2018 at 7:25 am

      Wolf,

      Nothing escapes you! Although, Patrick Byrne has a ham-handed style. I’m thinking with your past at the dealership, we could certainly do better. :D

  8. NoRush
    Apr 10, 2018 at 8:41 pm

    Actual sales I see at Neiman’s are fantastic and up triple digits. I’m not seeing anything negative. Business has never been better with them. They are a beneficiary of the stock market. Rolling debt is a different story, but they are an excellent merchant with talented people and a great eye for fashion.

    • Apr 10, 2018 at 9:25 pm

      Sales are up “triple digits?” Are you being sarcastic or did someone pay you to post this BS?

      In the last quarterly report, for the quarter ended Jan 31, 2018, revenues were $1.482 billion. While that is up 6% (“single digits” not “triple digits”) from the same quarter in 2017, it’s DOWN from the same quarter in 2016, and DOWN from the same quarter in 2015 ($1.523 billion). And so on. Revenues have been declining for years.

      So yes, there was one 6% uptick, finally, after years of decline, at a time when total retail sales across the country were the hottest in years, up 5.6% for the industry.

      • Apr 10, 2018 at 9:30 pm

        Oh, and Neiman Marcus lost $532 million in its fiscal year 2017 and $406 million in its fiscal year 2016.

      • Saltcreep
        Apr 11, 2018 at 4:49 am

        NoRush did say triple digits rather than a triple digit percentage, so I suppose that’s hundreds of dollars’ worth of increased sales.

        • Mike G
          Apr 11, 2018 at 12:09 pm

          2 is a digit. So it’s triple that.

  9. Ray Cornwall
    Apr 10, 2018 at 9:31 pm

    Fun bit of trivia:

    Nine West companies include a company called the Jewelry Group, a collection of various jewelry brands.

    One of those brands is…Ivanka Trump.

    Everybody go post TRUMP FILED FOR BANKRUPTCY on your social media. It’s actually true…sorta…kinda…maybe…

  10. raxadian
    Apr 10, 2018 at 9:47 pm

    Just buy a company by getting debt. Then put said debt on the company name and sell the company properties to pay debt while getting more debt in the company name. Then sell the company before it crashes.

    That’s what a LBO is, right?

    How come it is legal?

  11. Robert
    Apr 12, 2018 at 11:12 am

    There is so much going on in this country that is beyond ethical, beyond moral, beyond decent- and yet, legal- that it is nothing short of terrifying. Take the multimillion dollar life insurance policies being taken out by big banks on key financial officers who have been turning up dead the past few years- the natural question is, “Who in hell would issue such policies?” The answer is horrific: another bank which securitizes the risk and passes it off to some widows and orphan’s or teachers or fireman’s retirement plan.

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