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Apparel, specialty retailer debt maturities to swell in 2019

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Apparel, specialty retailer debt maturities to swell in 2019

While debt maturities will continue plaguing the retail sector for the rest of the year, a new S&P Global Market Intelligence analysis shows that the trend will significantly accelerate in 2019 and persist into 2020.

Default rates tend to be higher in retail than in other sectors, according to David Berliner, a restructuring partner at BDO Global, because sales at specialty retailers, along with apparel and accessories companies, can be vulnerable to fashion and other consumer trends. An apparel retailer that fails to hit the fashion trend in a given year can see its fortunes dramatically change if it is also beholden to heavy debt and high interest payments, Berliner explained, as tepid sales can easily mean default or bankruptcy for a company in such a financial position.

That said, Berliner noted that the current cycle of retailer defaults stands out as particularly heightened. Overall retail bankruptcies hit a six-year high in 2017, and defaults in the sector appear slated to continue at an above-average pace through 2018, 2019 and 2020.

A driving force behind the current cycle is the sector's continued attempts to grapple with a consumer shift to online shopping and declining shopping mall traffic. Retailers with heavy debt loads that are unable to maintain past revenue levels due to falling foot traffic are having a difficult time keeping up, he said.

"It takes a lot of money to refurbish your stores," Berliner said in an interview. "If you have a lot of debt, your focus is paying the debt down and you don't have the flexibility to compete with newer retailers."

S&P Global Market Intelligence found that a group of distressed specialty retailers and apparel and accessories companies hold debt totaling $1.80 billion that will mature in 2018. That figure jumps to $9.98 billion in 2019, followed by a decline to $4.63 billion in 2020.

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The analyzed group included specialty retailers and apparel and accessories companies with a distressed debt ratio — total debt over last-12-months EBITDA greater than 6x along with a 12-month interest coverage ratio lower than 2x — or an S&P rating lower than BB- since 2017.

A large amount of debt among this group is held by only a few companies, around half of which are owned by private equity firms. Retailers owned by private equity firms can carry higher debt loads because leveraged buyouts are often financed by borrowing, which is then added to the retailer's existing debt load.

Toys R Us Inc., which is now liquidating , is an example of a private equity-owned retailer that succumbed to its heavy debt load. The toy specialty chain holds the largest amount of debt maturing in 2019 among distressed specialty, apparel and accessories retailers at $3.0 billion, and in 2020, at $1.41 billion.

Toys R Us also has the nearest-term maturity: two term loans, totaling $123.0 million and $61 million, mature May 25.

For debt maturing in 2020, PetSmart Inc. holds the second-largest amount behind Toys R Us, at $750 million. S&P Global Ratings downgraded the private equity-owned specialty chain to CCC+ on Dec. 17, 2017, due to the company's unsustainable capital structure and its failure to scale the April 2017 acquisition of e-commerce pet supplies retailer Chewy.com.

Nine West Holdings Inc., which filed for bankruptcy April 6, has the second-largest debt pile maturing in 2019, with $1.89 billion. The footwear and apparel retailer is followed by Claire's Stores Inc., which filed for bankruptcy March 19 and has $1.51 billion in debt maturing in 2019. Both companies are owned by private equity firms.

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The retail sector overall has already seen a slew of defaults.

Sears Holdings Corp., Iconix Brand Group Inc. and Charlotte Russe Inc. all executed distressed exchanges that were classified as a default because investors received less than what was originally promised.

On the supermarket front, Southeastern Grocers LLC, parent company of the Winn-Dixie and Bi-Lo chains, filed for Chapter 11 bankruptcy protection March 27. Fellow supermarket chain Tops Markets II Corp. also opted to restructure in bankruptcy court, filing Feb. 21 after succumbing to competitive pricing pressures and a heavy debt load.

The forecast for the remainder of 2018 points to more pain for the overall sector.

The U.S. distressed debt ratio, which is typically seen as a precursor to defaults, remains elevated in the overall retail sector, according to S&P Global Ratings.

The retail and restaurant industries currently lead all industries with the highest ratio of distressed securities — defined as speculative-grade bonds with option-adjusted spreads above 1,000 basis points — tracked by S&P Global Ratings. As of March 16, 16.5% of issuers within all of retail and restaurants were trading in distress.

In addition to S&P Global's outlook, Moody's and Fitch also predicted more defaults in the overall retail sector for the rest of the year.

Moody's set the one-year U.S. retail default rate at 3.5%, the second-highest default rate of any industry except media, according to an April 9 report. Fitch's U.S. retail default rate is also higher than other industries. The agency's trailing-12-month retail default rate is nearly 9%, said Eric Rosenthal, senior director of leveraged finance at Fitch, in an April 23 report. That is more than 3x the average rate for all industries, which is 2.6%.

"The whole year is going to be dicey," said Charlie O'Shea, retail analyst at Moody's, in an interview. "The big and rich are getting bigger and richer, and our higher-rated retailers are performing better. But it's becoming degrees of difficulty harder for our lower-rated, highly leveraged companies."

S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.