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

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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.

“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.

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