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Fitch downgrades Nordstrom on coronavirus impact

Fitch Ratings on April 9 downgraded Nordstrom Inc.'s long-term issuer default rating and senior unsecured notes to BBB- from BBB, citing the impact of the coronavirus outbreak.

The rating agency maintained the outlook at negative.

Fitch said the downgrade and negative outlook reflect the significant business disruption caused by the coronavirus pandemic and the implications of a decline in discretionary spending that the agency expects could extend well into 2021, as well as higher leverage from the new secured bond offering.

In a scenario where discretionary retailers in the U.S. are closed through mid-May or early June, with sales expected to drop 80% to 90%, Fitch expects Nordstrom's revenue to slide more than 20% in 2020, with EBITDA declines approaching 70%. The company's revenue will fall 10% in 2021, compared with 2019, with EBITDA down about 20% over the two-year period, the agency added.

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However, Fitch believes Nordstrom has sufficient liquidity to deal with the downturn. The company had $850 million of cash by the end of 2019 and recently drew down fully on its $800 million unsecured revolver. The company also suspended its dividend and share repurchases and the company could significantly lower its capital expenditure from its original prospect of $600 million, Fitch said.

The rating agency said Nordstrom's ratings reflect its position as a market share consolidator in the apparel, footwear and accessories business. The company has strong customer loyalty because of its distinct merchandise and high level of customer service, the agency added.

Fitch could stabilize Nordstrom's rating if the company's EBITDA increases to $1.3 billion in 2021 and adjusted debt/EBITDAR, capitalizing leases at 8.0x, moderates to the mid-3x range in 2021 and under 3.5x in 2022.

A positive ratings action is likely if adjusted debt/EBITDAR was sustained under 3.0x, Fitch said.

Conversely, a more protracted or severe downturn, and lower confidence in Nordstrom's ability to return to top-line and profitability growth in 2022, such that adjusted debt/EBITDAR is sustained about 3.5x, could result into a negative ratings action, the agency added.

The rating agency also downgraded Nordstrom's short-term issuer default rating and CP ratings to F3 from F2; assigned a BBB to the company's new $600 million 8.75% senior secured first-lien notes due 2025, and affirmed its BBB rating on the senior credit facility.