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Struggling Retailers Propped Up by Easy Money

Troubled retailers are borrowing from risk-taking lenders, promising higher returns as some big retail chains use infusions of cash in their ongoing efforts to turn themselves around.

While stock markets continue to soar, negligible returns on U.S. Treasuries and most corporate debt and municipal bonds have prompted investors to look for better yields in less than triple-A rated retail enterprises.

Some analysts say that some of the retailers, now hoping for a reversal of their fortunes, will eventually go bankrupt or close their doors permanently. But the shakeout is inevitable. Industry experts say there are just too many stores.

In a report published in The Wall Street Journal, Antony Karabus, CEO of Hilco Retail Consulting, summed up the situation as follows.

“What you’ve got here is a market that still has more players than are necessary,” he said.

“They’ve [the troubled retailers] have bought themselves time, but their still all eating from the same pie.”

Discount retailers such as Dollar General Corp. have been nibbling away at that proverbial pie, gaining market share as national chains such as Walmart, J.C. Penney, RadioShack and Sears Holdings continue to lose their share of a finite market.

Sears, for example, holds a 2 percent market share, down from 2.9% in 2005, while Dollar General holds 1.1%, a doubling of its share since 2005.

Also gaining, while mid-priced retailers suffer, are certain up-market retailers, Neiman Marcus Group Inc. among them.

Major chains that have borrowed cash to implement their turnaround plans include J.C. Penney, RadioShack and Sears Holdings.

The question now for lenders is this: will their loans be repaid at the higher rate before their borrowers go bankrupt or go out of business?