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Coronavius could be fatal for struggling retailers facing downgrades, bankruptcy

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Coronavius could be fatal for struggling retailers facing downgrades, bankruptcy

An economic slowdown in the U.S. from the novel coronavirus could be the final push for some retailers and consumer goods companies already facing a credit downgrade to junk territory or bankruptcy.

As stores close and people isolate themselves, companies are bracing for a drop in consumer spending on discretionary categories including furniture and high-end apparel. The outlook is looking particularly risky for certain retailers and consumer goods companies that were already struggling with issues like debt payments and slowing sales before the outbreak, according to analysts.

"The consumer has been the one bright spot in the economy," Edward Jones analyst Brian Yarbrough said in an interview. "If you're a retailer that has been struggling in that environment," he added, "a one- or two-month slowdown could be it."

While the U.S. government has not issued recommendations specific to retailers, guidelines released March 16 by the Trump Administration direct consumers to avoid eating and drinking establishments, including bars and restaurants, for 15 days. Trump's guidelines also caution against unnecessary travel as well as gathering in group of 10 or more.

Some local governments are doing more. Multiple counties in California's Bay Area, including the City and County of San Francisco, implemented a shelter-in-place order March 17 that allows only businesses deemed essential — including grocery stores, pharmacies and restaurants operating on a delivery-only basis — to operate for three weeks. Restaurants in several states are only allowed to offer take out or delivery services.

Retailers and consumer goods companies with debt coming due, high leverage ratios and low cash flow are most susceptible to even a temporary slowdown, said Anthony Chukumba, a managing director at the equity division of Loop Capital Markets. Retailers with a higher proportion of discretionary merchandise are also more exposed, he said.

"The more discretionary merchandise, the more at-risk you are," he said, adding that he expects social distancing measures and restrictions on the size of public gatherings to affect retailers' results for at least two quarters.

Retailers that sell high-value items, such as couches and accessories, could also fair poorly in a coronavirus-prompted downturn, said David Berliner, a restructuring and turnaround services partner at BDO.

Consumers are "not going to be running out to furniture stores to buy furniture or malls to buy clothing," he said.

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Retailers ranging from department store J. C. Penney Company Inc. to apparel chain J. Crew Inc. are among the consumer companies on the Restructuring Watchlist, which is compiled by LCD, an offering of S&P Global Market Intelligence. The list includes companies that are at risk of restructuring over the next 12 months.

Some, such as Ascena Retail Group Inc., which operates Loft and Ann Taylor apparel stores, have seen lower credit ratings, with rating agencies citing an economic slowdown from coronavirus. Analysts for S&P Global Ratings wrote March 16 that Ascena is likely to default on its debt or restructure its business in the next six months in part because the spread of coronavirus "will further pressure store traffic and limit conventional refinancing prospects."

Ascena's executives said during an earnings call March 9 that the company had not factored any effects from coronavirus into its guidance. But Executive Vice President and CFO Daniel Lamadrid said: "Customer behavior may be impacted as the situation develops."

Retailers considering a liquidation or store closings during a coronavirus slowdown might not take action immediately as they would during normal times, BDO's Berliner said.

Closing sales, which provide creditors with a key source of repayment, would be harder to executive if shoppers are staying home, Berliner said in an interview. That means that the parties in a bankruptcy might be "better off keeping it afloat or deferring the sale until the mall reopens," he added.

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Other companies, such as toy maker Hasbro Inc., Coach owner Tapestry Inc., auto manufacturer Ford Motor Co. and Dollar Tree Inc. have credit ratings of BBB-, the lowest investment-grade mark that a company can receive.

S&P Global Ratings cited both challenges sourcing products from China as well as a slowdown in consumer discretionary spending as it downgraded retailer Big Lots Inc. to BB+ from BBB- March 10.

Companies with non-investment grade debt are at particular risk over the next two years, with $18.5 billion in debt maturing at retailers in 2021 and 2022, Moody's Investors Service wrote in a March 17 report. Those companies "will find it increasingly difficult to refinance" thanks to coronavirus, the report said. The report forecasts a slowdown in economic activity during the first half of 2020 but added that "risks to the downside remain high."

How long the downturn will last, and whether consumer purchasing will pick up after coronavirus subsides, remain unclear. Loop's Chukumba said that retailers could see sales return to normal quickly once the disease is under control.

But, he said: "In the near term, this is cataclysmic."