Retail Defaults at All-Time High

There were more signs of a retail apocalypse in the first quarter of this year.

Defaults by retail companies rated by Moody’s hit an all-time high in Q1. There were a total of nine defaults among Moody’s-rated retail corporates. According to Wolf Street, total corporate defaults in Q1 were up 22% from last year, and the nine retailer defaults accounted for nearly 1/3 of them.

As Wolf Street put it, these are not mom-and-pop stores.  These are retailers large enough to be rated by Moody’s –  “corporations that make up the core of the Brick-and-Mortar Meltdown.”

Here are some of the retail companies that defaulted during the first quarter.

• Sears Holdings
• Claire’s
• Bon-Ton Stores
• The holding companies that hold Tops Markets, a grocery chain in New York, Pennsylvania and Vermont
• Charlotte Russe, a women’s clothing retailer

Of course, default doesn’t necessarily mean bankruptcy. Some of these companies may be able to restructure their debt and prosper. But several of these corporations have already declared bankruptcy, including Sears, Clarie’s and Bon-Ton stores. More significantly, the high number of defaults reveals serious problems in the retail sector – and the broader economy.

The second quarter didn’t start off any better. Last week, Nine West Holdings declared bankruptcy with $1.6 billion in loans. The company owns a number of well-known brands, including Nine West, Anne Klein, Gloria Vanderbilt and Bandolino.

Fitch Ratings’ trailing 12-month institutional loan default rate of retailers rose to 8.6%, with $5.9 billion in loans now in default. Fitch paints a gloomy picture.

Our retail sector institutional term loan default rate forecast is 10%, equating to $7 billion of volume, which would surpass the 8.2% rate the sector set in 2017. Fitch anticipates more large retail chains to file bankruptcy this year. Ten percent of the retailers in Fitch’s market index are listed on Fitch’s Top Loans of Concern list, indicating a material default risk. These retail chains include: Neiman Marcus Group, Sears Holdings, FULLBEAUTY Brands, David’s Bridal, TOMS Shoes, Indra Holdings, Everest Holdings, Things Remembered, NYDJ Apparel and Vince.”

As Wolf Street put it:

So this process of the brick-and-mortar meltdown that has already caused so much pain among employees, pension beneficiaries, creditors of all kinds, shareholders, mall owners, shoppers, and other stakeholders is far from over.”

Moody’s echoed the typical mainstream theme, blaming the woes of brick-and-mortar retailers on a shift toward online shopping. The rating agency said the rising level of retail defaults is “reflecting the fallout of changing consumer behavior and advancing e-commerce for traditional brick-and-mortar retail.”

But while it is certainly a factor, we can’t blame Amazon for the retail meltdown. The big story is debt.

The story behind the Toys R Us bankruptcy gives us a glimpse at a fundamental problem eroding the strength of the US economy – easy money created by Federal Reserve monetary policy. The ability to borrow a lot of money at low interest rates fuels borrowing and speculation. Malinvestment distorts the economy and inflates bubbles that eventually pop.

Over the last 20 years, the Fed has inflated and maintained a giant retail bubble.

All of that debt is beginning to come due. In an in-depth report published last fall,  Bloomberg reported that $1.9 billion in high-yield retail borrowing will come due in 2018. And from 2019 to 2025, the debt coming due will balloon to an annual average of almost $5 billion.

The amount of retail debt considered risky is also rising. Over the past year, high-yield bonds outstanding gained 20 percent, to $35 billion, and the industry’s leveraged loans are up 15 percent, to $152 billion, according to Bloomberg data. Even worse, this will hit as a record $1 trillion in high-yield debt for all industries comes due over the next five years, according to Moody’s. The surge in demand for refinancing is also likely to come just as credit markets tighten and become much less accommodating to distressed borrowers.”

There’s another big problem for the retail sector – a problem even Amazon can’t escape.

Americans are broke.

Household debt has surged to record levels. Americans have maxed out the credit cards.

In other words, the struggles in the retail sector reveal deeper cracks in the overall economy. We are over-leveraged and interest rates are going up. This doesn’t bode well for the future.

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