It's Just Starting: Moody's Warns A Deluge Of Retail Bankruptcies Is Coming

2017 was a perfect storm for "brick and mortar" retailers who officially lost the war with Amazon, and no less than 30 retail chains filed for bankruptcy in a year in which the CEO of Urban Outfitters said the "retail bubble has now burst"...

Source: Reorg First Day

... bringing the total number of Chapter 11 cases since mid-2015 to 50, accounting for over $20 billion in liabilities.

So is the worst over for retail, or is the sector just now approaching the eye of the hurricane?

According to the latest Moody's research report on the retail sector, the rating agency now forecasts at least six retail & apparel issuers defaulting over the next 12 months, with most of these occurring in the first half of the year. 

While the good news is that the industry default rate is expected to peak at 12.43% this March, Moody's cautions that the still-high default forecast for the remainder of 2018 points to more pain before this lower ratings rung in retail stabilizes. Recent defaulters include Tops Markets, which filed for Chapter 11 on February 21, which followed Bon-Ton's filing on February 4. Charlotte Russe and Charming Charlie both defaulted in December, and Claire's has hired restructuring advisors.

Meanwhile, the Toys “R” Us bankruptcy in September its overnight Chapter 7 liquidation has only added to pressures by accentuating potential pressures between vendors and the more stressed retailers, even as it left some 33,000 employees without a job.

The problem is that it only gets worse from there, and the rating agency expects upcoming maturities for distressed issuers will spike in 2019. Defaults are growing as many struggle with high leverage and challenged operating performance. These challenges are compounded by the biggest risk - mounting maturities -  which spike in 2019. Overall, issuers in the Caa1 and lower group face $14.9 billion in public and private maturities due 2018 through 2020 as shown in Exhibit 1. The lion's share of these maturities (Exhibit 2) is attributable to just five issuers:

  • Sears Holdings Corp. (Ca negative),
  • Neiman Marcus Group LTD LLC (Caa2 negative)
  • Claire's Stores, Inc. (Ca negative),
  • BI-LO Holding Finance (Caa1)
  • Guitar Center Inc. (Caa1 negative).

Additionally, while the credit markets have remained open to refinancings, those with more challenged credit profiles and operating performance problems will face growing challenges in tapping the markets, especially in an environment where monetary policy is tightening.

Meanwhile, spooked by the Toys "R" Us fiasco, many others will face the risk of vendors pulling the supply plug in the wake of Toys “R” Us bankruptcy, which was triggered when certain vendors cut the company off. As companies move down the rating scale, the vendor portion of the liquidity profile can become strained as concerns over the strength of the company are magnified. Tighter repayment terms, including the dreaded “cash on delivery” (COD), can have an even more serious impact on liquidity than a looming debt maturity. Without vendors, companies don’t get merchandise, and without merchandise, there are no sales.

So in addition to the above 5, who else is on the list?

Many of the names on Moody's distressed list, and those that have filed for bankruptcy in the past 12 months, are, or rather were, sponsor-owned. It will hardly surprise anyone that many distressed retailers are highly leveraged following sponsor-led LBOs. High leverage has proved problematic for the retail industry due to the industry's inherent cyclicality and operating income challenges post-recession. Such pressures have been vastly aggravated the past 10 years with the rapid rise of online competition, which has severely squeezed profit margins across the board.

The debt loads assumed by many smaller retailers have created an untenable competitive reality: they are financially ill-equipped to deal with the changing retail landscape. They also lack sufficient resources to build out online  capability, keep stores fresh, and fend off pricing threats from larger competitors. The successful retail LBO stories, such as Dollar General Corp. (Baa2 stable) and BJS Wholesale Club Inc. (B3 stable), have typically been those that haven't needed to compete online.

The exhibit below lays out the quantitative characteristics of the 20 distressed issuers in Moody's Caa/Ca universe. Putting these metrics into perspective the debt/EBITDA Caa ”range” is 6-8x, with the EBIT/interest “range” 0.5-1x. Debt/EBITDA above 8x results in a Ca score, as does EBIT/interest below 0.5x.

And before we present the full list of upcoming maturities over the next 3 years, virtually none of which will be made, here is Moody's brief discussion on whether the retail situation is improving.

Buoyed by favorable macroeconomic conditions, as well as the potential favorable impact from the US Corporate Tax Law change implemented by Washington in late 2017, we believe retail is improving. However, we continue to believe that a “have/ have nots” phenomenon is accelerating, with the effect akin to a teeter-totter. As the larger, better capitalized retailers continue to grow and prosper, the smaller, highly-leveraged retailers are struggling harder to compete and survive.

There are four key pillars that retailers need to have in place to remain healthy, similar to the stability that the four legs provide for a chair: capital structure, liquidity, capital spending, and competitive position. As we progress down the ratings/credit quality scale, these four “legs” tend to get more distorted in relative “length” to each other. For example, a retailer with high leverage will potentially have problems in all four of these categories, which we explain as follows:

  • Capital structure: When leverage remains stubbornly high and operating performance fails to keep pace, the capital structure is  significantly weakened over time. Ultimately, the burden of too much debt always wins. A leveraged capital structure has deleterious effects for liquidity, capital investment, and competitive positioning.
  • Liquidity: This is the oil that keeps the engine running. An unfriendly or onerous debt maturity schedule makes it difficult to keep the oil flowing, and as we saw with Toys “R” Us, can create enough vendor concern to cause a bankruptcy due to a trade squeeze.
  • Capital spending/investment: Without money to invest, stores get tired and therefore become unattractive to shoppers. Websites lose their ability to keep up with competitors and become unattractive to visitors. Supply chains slow down, negatively impacting inventory efficiency.
  • Competitive position: Competing with larger, better capitalized retailers is challenging in a static environment. Today’s retail is as volatile as ever driven by the secular shift to e-commerce, making competition the most acute it has ever been. And, in the midst of this, Walmart and Amazon are fighting the battle of the century over market share, using price as a key weapon. Virtually every other retailer runs the risk of being collateral damage in this battle, making flexibility critical, which is an asset most lower rated retailers do not own.

That was Moody's being diplomatic. The real answer, as shown in the table below which lists the full schedule of upcoming debt maturities by retail issuer, is that unfortunately no, for most retailers except a handful of very prominent online names, the situation is not only not improving, but it's never been worse.

Comments

ZeroSpam lloll Thu, 03/15/2018 - 18:34 Permalink

^^^ lloll ^^^ CHRONIC SPAMMER  ^^^ VIRUS ALERT ^^^^

This chronic spammer (aka "stizazz" and "pier" -- possibly banned) is a CHRONIC SPAMMER whose "disguised links" ("Graphic images", above) will take you to his Spam- and Trojan-laden webpage, fondly known by ZHers as "The Whacked Out Biblicism SPAM page" where you will be the happy recipient of numerous virus from this very disturbed and obsessed individual, spamming here for more than five years.

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Copy and send this text to abuse@zerohedge.com

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In reply to by lloll

TAfool ZeroSpam Fri, 03/16/2018 - 01:19 Permalink

I use to complain about this guy and others like him but quit a long time ago. Z-H doesn't give a shit and that is clear by their past inaction (and I bet they won't act this time either because they still don't give a shit).

 

Along with the loss in quality articles has come the loss in quality posters. It seems I no longer come here for quality info but instead because of a bad habit; or maybe its just hopefulness.

 

TA

In reply to by ZeroSpam

californiagirl TAfool Fri, 03/16/2018 - 04:30 Permalink

A bigger and bigger chunk of take-home pay is being consumed by ever increasing taxes, housing, utilities, food, gasoline, etc. REAL Incomes have not kept pace with REAL inflation. So, that means less money for clothing, kitchenwares, entertainment, travel, art, luxuries, etc. So retail will continue to decline. People will have a lot less stuff. Choices and quality have already declined significantly, and will continue to do so.  No one should be surprised.

In reply to by TAfool

jbvtme kralizec Sat, 03/17/2018 - 09:35 Permalink

the internet replaced the middlemen, an expensive and wasteful business model, as it should have. the fact that bezos is THE middleman is because we're lazy. i buy directly from the seller as much as i can. often i find books and cheaper directly from the bookstore seller. it takes a bit longer but so does parking your car at the back of the lot when you're going to the gym and actually walking to the front door.

In reply to by kralizec

Endgame Napoleon localsavage Fri, 03/16/2018 - 12:47 Permalink

Although you are right about give-a-care staff, the larger trends detailed in this article explain a lot. Sad, I think issues of insufficient liquidity and under-capitalization explain the demise of one of the places where I worked. It was a unique retail space and a company, employing not just a lot of retail salespeople at better-than-normal wages and commission, but also lots of factory workers. They took on a lot of debt to set up shop in one of the most upscale areas in the state, and they were competing with another retailer that has more of everything on that list, albeit the store I worked for had a more comprehensive selection. They had the best brands, and we sold a lot. The vendor issues probably explain most of it. Nothing unique like that survives long anymore, although they lasted for many decades. 

In reply to by localsavage

The Ram HRClinton Fri, 03/16/2018 - 06:02 Permalink

That was my first impression - these are all crap stores and they would have gone bankrupt even in 'good times.'  Retail stores come and go no matter what is happening in the 'economy,' although truth be told, there is a lot less disposable income today.  The decrease in disposable income will definitely put the fetters on a consumer economy like America.  Not a bright future for main street America.  Many more 'Baltimores' to be developed.

In reply to by HRClinton

scam_MERS CarthaginemDel… Thu, 03/15/2018 - 19:06 Permalink

I logged in just to upvote you, I despise Bozos and Scamazon with a passion. Like others here, I go out of my way NOT to buy from him. I use up their bandwidth "showrooming" on the site, then buy from Ebay or Walmart. ABA is my motto (Anywhere But Amazon). I can't wait for the day the stock comes crashing back down to Earth from the nosebleed 300+ P/E. Same goes for NetSux, not a subscriber and never will be. If you have time, check out LeonFlix, a free alternative to NetSux, since alluc.ee went belly-up the other day, it's the best free video app for Windows that I've found so far.

In reply to by CarthaginemDel…

Crawdaddy scam_MERS Thu, 03/15/2018 - 22:24 Permalink

lol if you want to screw over the nwo monkeys dont use walmart or sams. Old Sam was the friendly face of the nwo before nwo was cool. They used to hide behind buy america stickers but now they don't bother. He busted out the mom and pop's, some of which had it coming, and killed small business under the fake disguise of process improvement and optimization. To add insult to injury he financed the rise of the Clinton clown show.

Walmart and Sams is a storefront for monsanto crops and bankster owned oil company plastic formed in China. Walk in and smell the globalist love!

In reply to by scam_MERS

rgraf localsavage Fri, 03/16/2018 - 12:28 Permalink

The boards know what they're doing. They're moving empire to China, with Russia being the enforcer. Remember Obama firing the GM CEO and installing some bimbo, who promptly invested in China? Why would any rational board ever put an idiot like Marissa Meyer in charge of Yahoo? A 'coder' in charge of Yahoo made no sense, when they needed marketing help. And, technically, she was a double failure. Yahoo suffered the largest data breach ever, and then, an even larger one. So, it's all across the board, not just in retail brick and mortar.

Radio Sack made bad decision after bad decision. They could have owned the personal computer market. There was no way they had any business getting into the cellphone market. By the time they entered, there were already cellphone stores at just about every strip mall and shopping center they had stores located at. And they totally missed out on the markets that fit into their niche. 3D printers, drones, Arduino/RasPi and more.

 

At some point, the board members will feel the wrath of the consumers, once the bankruptcies have peaked. The imbeciles that run finance can not control themselves, and when the populace finally figures out that all the politicians are bankster puppets, they'll have to flee. When Amazon out Walmarts Walmart, they'll fail, in the most spectacular crash ever televised.

In reply to by localsavage

Endgame Napoleon rgraf Fri, 03/16/2018 - 13:35 Permalink

It is all sooooooo heartwarmimgly patriotic, the mass-scale abandonment of the United States of America for whatever dictatorship they can find with a vast pool of cheap labor until robots and lights-out manufacturing displace most human labor.

I am sure elites will find a way to sell the continued, calculating offshoring exodus to Asia, Latin America and likely Africa—with its deposits of cobalt, necessary for smartphone production, which probably give it leverage in demanding offshoring privileges for its low-wage laborers.

Elites will [try] to sell that, too, as altruism—the noble globalists reaching out to the impoverished African continent to lend a helping hand. Doubt that will play in the Trumpian Era, and while he has caved on some issues, Deplorables do have Trump to thank for the downward shift in tolerance for that particular brand of BS. 

Elites might even use out-of-the-box marketing ideas, confusing underemployed America—with its 50 million out-of-the-workforce citizens and with half of its “employed” people, working part time with average yearly earnings of $13k—by acting like they care about America’s decline, while continuing on their merry, globalist ways. 

I see your point about some retailers, Radio Shack in particular. They should have courted the PC-savvy techie types, not so much the ones concerned with the fashionable aspects of tech that the big hardware manufacturers and the mobile phone providers court, but the serious, true-nerd “hobbyists,” like in the old days of tech.

Radio Shack was not boutique-like in terms of the style and fashion scene, and the smartphone business IS about surface in many ways, whether or not techies like that. But Radio Shack was more specialized in the way boutique, niche-market businesses are—the kind of place they call a destination, rather than a one-stop big-box emporium. 

Places like Best Buy are catch-all big-box retailers that attract people looking for vast selection and low prices, like people who shop at Wal*Mart and Amazon. Those stores attract people who are willing to navigate antiseptic behemoths for the best price.

Due to superior style and ease of use, Apple does not have to compete based strictly on price, but it is good that they are going to offer a price-down alternative, with similar high-style appeal, along with the top-of-the-line, no-compromises options, too.

The real, non-fashion-forward, hardcore-tech nerds and the homeschooler parents, using those Raspberry Pi things to teach coding, really have no retail spaces, catering strictly to their nonsense-free needs. They could have staffed niche-market Radio Shacks with some mid-range tech nerds, giving them higher-paying salary-plus-commission retail jobs for providing a better quality of service to that more serious clientele base, possibly offering more research services to find merchandise that is harder to come by. Like you say, the gargantuan retailers are going to take everything but the niche markets. 

In reply to by rgraf

slyder wood dirty fingernails Fri, 03/16/2018 - 07:42 Permalink

GC is Musiciansfriend. I’ve gotten non-instrument stuff from MF, mixers, powered monitors, sometimes a pedal. Fortunately, we had a good local store (Grandmas) where I bought instruments that I could play first. A month before they went outta business Gibson road show was at the store. Walked out with a Les Paul Tribute which is an unadorned Standard (never liked their fret binding) for $800. I played it unplugged for half hour, felt the resonance all the way up into headstock, thru body. Then plugged it in, sounded great with their PAF Alnico IIs. Through the years many LPs were sure pretty to look at but we’re dead pieces of wood. My first LP Deluxe I paid $400 back in early 70s. My go to axe is my beloved 84 G&L Invader with ebony fretboard, 12” radius. Had it refretted recently. That guitar does everything I want it to do. I’m partial to the 25.5 scale but you gots to have an LP in the stable.

In reply to by dirty fingernails

richsob Thu, 03/15/2018 - 17:34 Permalink

And now we get to hear how it's all Amazon's fault.  By the way, I just received another Amazon delivery today with products that we tried to find locally and couldn't find them or were way the hell too over priced.  So, we did what we always do when confronted with that problem: we ordered another $40 worth of stuff from Amazon.  And I'm sure that was the  final blow to all these companies that were bought/funded with PE and Hedge Fund money and now realize they can't service their debt.  GMAFB