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Debt Could Be the Death Knell For These Distressed Retailers

2021 isn’t likely to deliver the same level of financial implosion that rocked retail and apparel last year, according to Moody’s Investors Service, though the credit ratings firm’s outlook is higher than other post-recessionary periods.

The rating firm’s forecast of a 5.3 percent default rate for apparel and retail firms this year hews fairly closely to 2009’s 6.1 percent benchmark amid the Great Recession. Plus, department stores and apparel firms are battling intense long-term pressures amid changing consumer habits and preferences. That means highly levered retailers will remain vulnerable in 2021.

“Last year companies with sector challenges, competitive disadvantages, operational issues or highly leveraged balance sheets defaulted at a greater rate than the larger, more diversified companies. This trend will continue in 2021,” Raya Sokolyanska, Moody’s vice president and senior analyst, said in a report issued Wednesday on retail debt and speculative-grade defaults.

Defaults continue to be concentrated in the apparel and department stores sectors. In 2020, they comprised 53 percent of retail and apparel defaulters, and accounted for 63 percent from 2017 to 2019.

“Secular challenges and pandemic lifestyle changes are still hurting these sectors,” Sokolyanska said.

Most of the defaults in 2020 resulted in bankruptcies, while in 2019, 70 percent were distressed exchanges, or when a debt-strapped company offers its creditors a restructured debt or similar arrangement to avoid bankruptcy. Over the period from 2009 through 2019, retail and apparel defaults were fairly evenly split between bankruptcies and distressed exchanges, and the credit team at Moody’s believes retailers will use whichever option best addresses their situation, depending on market conditions, the terms of their leases and their specific investor base.

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Last year saw a total of $21 billion in rated retail debt go into default. The struggling firms that ended up in bankruptcy include J. Crew, J.C. Penney, Neiman Marcus, Men’s Wearhouse and Ascena Retail Group. Sokolyanska noted that 2021 already had its first default when Belk filed for a prepackaged Chapter 11. The Men’s Wearhouse filed under the name Tailored Brands Inc., the entity created following the acquisition of Jos. A. Bank Clothiers Inc., a move that saw The Men’s Wearhouse undertake a leveraged balance sheet to complete the deal.

Who’s at risk?

At the moment, nine out of 13 retailers and apparel bond issuers have a rating of Caa1 or below, which is viewed as junk territory. Neiman Marcus successfully exited bankruptcy proceedings in September and shed over $4 billion in debt in the process. But it is still remains on Moody’s Caa1 and below list due to ongoing challenges. The bankruptcy just means it now faces a “less immediate default risk,” Sokolyanska said.

Neiman for its part on March 30 said it has refinanced a portion of its exit financing with new senior secured notes that extend its debt maturities to 2026. “This refinancing validates the momentum we are seeing as we continue to execute on our strategic transformation plan amidst improved market conditions,” Brandy Richardson, executive vice president and chief financial officer, said. “We have additional financial flexibility as we invest in our supply chain, elevate our digital excellence and deliver unparalleled luxury experiences.”

While robust credit markets have helped companies, including retailers, raise new debt and equity to protect against extended demand disruption, the problem they face is that certain secular pressures haven’t gone away. And that’s one of the reasons why the retail default rate forecast for 2021 remains historically high.

Of the nine specialty apparel and department store retailers rated Caa1 and below, four are rated Caa1, including Boardriders Inc., Premier Brands Group Holdings LLC, NMG Holding Co. Inc. (formerly Neiman Marcus Group) and Men’s Wearhouse LLC.

Three—SHO Holding I Corp. (Shoes for Crews), Outerstuff LLC, Jill Acquisition LLC and Belk Inc. (post emergence)—have a Caa2 rating. Talbots Inc. has a Caa3 rating. With the exception of Talbots Inc., all of the firms on the list either have filed for bankruptcy or defaulted on their debt. A few, such as Jill Acquisition, which has the J.Jill stores and online platform, managed to work out a restructuring plan with lenders. But even a bankruptcy isn’t a sure solution. Tailored Brands, which has The Men’s Wearhouse and Jos. A. Bank nameplates, needed to obtain $75 million in additional financing three months after its exit in December from bankruptcy proceedings.

As for future challenges, Moody’s said retail was under duress even before the Covid-19 pandemic. “This reflected declining mall traffic, overextended store networks, margin pressures from e-commerce competition, high omnichannel investment needs and an accelerating fashion cycle,” Sokolyanska said.

While vertically integrated apparel retailers have been challenged due to their reliance on large store footprints, apparel brands have benefited from international growth and in their ability to “pivot to winning channels.”

“In 2020, the shakeout in these subsectors remained acute. As pandemic lifestyles centered around the home, yard, digital and outdoor activities, consumers had limited need to spend on clothing,” Sokolyanska said.

She added that many retailers saw their cash burn continue as consumers shunned malls even after stores reopened. That’s unlikely to change anytime soon until demand picks up. And demand won’t pick up until consumers head back to the office, bars and restaurants and travel destinations in greater numbers.