It’s worse than the Great Recession for US retailers

By

Jennifer Braun

Published
Feb 28, 2017

In 2016, US retailers felt the pinch and according to Moody's Investors Service retail credit analyst, the US retail environment is not in the green just yet.
 
A new report by Moody's reveals that the number of distressed U.S. retailers has more than tripled since the Great Recession of 2008-2009. And while the number of low-rated retailers is growing, so are debt maturities, meaning the situation is likely to worsen.
 

The rating agency has 19 names in its retail and apparel portfolio now trading at Caa/Ca.
 
"Moody's-rated US retailers rated Caa or Ca today make up just over 13 percent of our total rated retail portfolio, which is the highest level since the Great Recession, when this group comprised 16 percent of the portfolio," says Moody's Vice President Charlie O'Shea, in a news statement. "And the increase comes at the same time as the broader universe of Caa rated companies is likewise growing."  

In terms of debt, the 19 Caa/Ca companies in the agency's retail portfolio owe roughly $5 billion in debt through 2021, with about 40 percent of this due by the end of 2018 and a spike during 2019.
 
The increase in distressed retailers follows a long period of low interest rates. Such cycles tend to produce a new pool of B2 or B3 rated companies, which don't have far to fall into the lowest rating tier, Moody says. Claire's, J Crew, Tops and rue21 are examples of such companies who now have a weak credit metrics after taking on high levels of debt.
 
In order to keep up with stronger competitors, O'Shea suggests that retailers “take more desperate measures, including highly promotional pricing that can border on irrational.” Adding that; “this leaves stronger firms with the choice of either competing in a race to the bottom, or giving up sales in order to preserve margin."