It’s looking a lot like 2008 in retail.
About 14 percent of retailers monitored by Moody’s Investors Service are now considered distressed issuers with a “Caa” or “Ca” rating, the highest rate since the Great Recession, when such ratings peaked at 16 percent.
“Distressed issues are now nearing recession levels,” Moody’s said in an analysis Monday.
The 19 distressed retailers and apparel companies covered by the firm hold some $3.7 in public debt, about 30 percent of which is due by the end of 2018.
“There are many factors that determine rating migrations, but those in the distressed retail and apparel pool typically share at least some of these five common characteristics: stressed liquidity, weak quantitative credit profiles, challenged competitive positions, sponsor ownership and erratic management structure,” Moody’s said.
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Of those characteristics, however, the agency pointed to companies with weak liquidity, even if they are otherwise in relatively stable condition, as the “most vulnerable” to default on their debt.
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Retailer’s with a distressed rating that Moody’s singled out as also having weak liquidity include Claire’s Stores Inc., Rue 21 Inc., NYDJ Apparel LLC, True Religion Apparel Inc., Charming Charlie LLC and Indra Holdings Corp.
Claire’s has about $26 million in senior subordinated notes due June 1, making it first up of the most-distressed retailers to have a big payment coming. In January, the company pulled plans for an initial public offering.
The accessories retailer has a “Ca” rating and a negative outlook and has been on Moody’s watch list for months, based in part on its “unsustainable capital structure.” The rating agency said Claire’s recently made its second distressed exchange in six months in an effort to reduce its debt load by about $400 million.
“Operating performance is likely to remain challenged, though the exchange did serve to improve liquidity as it eliminated some shorter-term maturities,” Moody’s said. “Claire’s earnings will be challenged to achieve even 2015 levels of operating performance given the increasingly competitive landscape, difficult mall traffic trends and economic headwinds and uncertainty surrounding Europe (including FX volatility and terror threats).”
Rue 21 is another retailer with a negative outlook from Moody’s, but its troubles go beyond high debt and weak liquidity and speak to the larger issues facing many apparel retailers at the moment.
Moody’s cited the “discretionary nature” of Rue 21’s product and the economic pressures facing its “lower-income target customer,” namely teenagers, along with its lack of differentiation among a “highly competitive and fragmented ‘fast-fashion’ industry,” as cause for default concern.
Rue 21’s next debt maturity comes in October 2018, but as a private company, the amount of debt due is not disclosed.