More Retailers Are Distressed, but Risk of Default Varies

While the major credit rating agencies have expanded their watch lists of retailers with a high probability of default, there are only a few companies in immediate danger following the bankruptcies of Neiman Marcus and J.Crew Group. They include nutritional supplements chain GNC, musical instruments retailer Guitar Center, grocery banner The Fresh Market, apparel retailer Ascena Retail Group, fabric purveyor JoAnn Stores and department store operator Belk. None of these companies responded to a request for comment from Adweek. David Silverman, a retail analyst at credit rating agency Fitch, noted that this forecast is limited to retailers in the agency's coverage area, meaning mostly large regional and national chains. That would exclude small businesses and retailers that, while troubled, are outside of rating agencies' coverage universe, such as Stage Stores, which also filed for bankruptcy this week. The number of such retailers in immediate danger of having to file for bankruptcy or restructuring has been limited, partly because stores are reopening quicker than anticipated. [article_summary section="1"]"Within our coverage universe, as long as store closures only seem to be a couple of months long, not many of our companies have upcoming maturities that they would need to address," Silverman explained. According to Sarah Wyeth, lead retail analyst at credit rating agency S&P, a number of retailers were caught slightly off guard by how fast local and state governments are allowing reopenings to happen. "We’re at a point where everyone is focused on how we’re going to open," she said. "For the most part, issuers are following the mandates going out state-by-state or even locally." She said the storyline has shifted to how the industry will manage a gradual opening, and that's good. "It gives people some hope," she said. "It’s nice to think, or believe, there’s a light at the end of the tunnel. We don’t know if it’s a train or actual light, though." Regardless, there are certain troubled retailers, such as GNC, whose debt maturity date is coming up this week, that will need to come up with a near-term restructuring plan, Silverman said. On Monday, GNC said it cannot make the maturity payment due this Friday. The company warned that unless it can reach some kind of deal on a restructuring, refinancing or an extension on the payment, it may have to file for Chapter 11. JCPenney, which is already considered to be in default by credit rating agency S&P, is in the midst of a five-day grace period on an interest payment it skipped last week, he said. The department store chain is reported to be weighing a restructuring, which includes a likely bankruptcy filing. Guitar Center was downgraded by credit rating agency Moody's on April 10, pointing to an increased probability of a debt restructuring. The company was reported to have missed interest payments on its bonds in April, entering a 30-day grace period, with its revolving line of credit coming due in July. J.Jill, a women's clothing retailer, is also viewed as in danger, though given slightly better odds of avoiding a default in the near future, with rating analysts split on its chances. About The Fresh Market, S&P said: "Despite our expectation that grocers will benefit from consumers' elevated consumption of food at home, we view The Fresh Market's credit protection measures as weak and an elevated risk of distressed exchange or restructuring." Such companies either face a liquidity crisis, in that they are running out of cash, or a near-term maturity. "It's either a maturity or covenant issue, where risk lenders won't give amendments or a waiver," Wyeth explained. "Or, it's just cash burn," she added. Other retailers that have already defaulted include J.Crew Group and Neiman Marcus, which both filed for bankruptcy, as well as Mister Car Wash and Steak 'n Shake, both of which had distressed exchanges. Neiman Marcus' Chapter 11 filing last week actually lifted the loan default rate for the retail sector to a record high, to 13% from 9%, according to Fitch senior director Eric Rosenthal. By year end, the loan retail default rate will hit 19%, Rosenthal added, with defaults also anticipated for Serta Simmons Bedding in addition to Ascena and JoAnn. On the other hand, a number of distressed retailers on watch lists, such as Men’s Wearhouse parent Tailored Brands and Party City, that should have enough liquidity to survive the pandemic in the short term and are not currently considered to be in danger of a near-term default, rating analysts said. Silverman said barring a resurgence of Covid-19, there's no triggering event for a default by these retailers. According to S&P, retailers that are distressed but not in imminent danger include Academy Sports + Outdoors, Petco, Party City, Rite Aid, Tailored Brands, 99 Cents Only Stores, At Home Group and Talbots. However, because of the debt incurred to keep operations afloat as stores are closed, these companies are still at risk of defaulting in the longer term, with a likely recession and operational challenges making it difficult for them to generate sales and refinance debt. "They have more rope," Wyeth said, "but we’re doubtful they are going to be able to come out the other side [of the recession] and provide lenders their original promise."

Data & Insights

While the Number of Distressed Retailers Grows, Only a Handful Are at Risk of Near-Term Default

Some companies face the immediate prospect of needing to restructure

Richard Collings

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Richard Collings