Misery loves company when it comes to credit ratings in a retail world shut down by COVID-19.
While J. Crew Group Inc., Neiman Marcus Group and J.C. Penney Co. Inc. are all seen as filing for bankruptcy within the next few weeks, the list of companies struggling with weak credit ratings and at risk of some kind of default are growing.
“Over the past month, the number of distressed retail and apparel issuers has begun to grow again, with the ranks of [those with a credit rating of] Caa1 and lower at 23 as of April 24, up from 17 in mid-March,” Moody’s said on Friday in an update on the U.S. retail and fashion space. “These companies, along with the nine B3 negative names, account for about 42 percent of our total speculative grade retail and apparel rated universe.”
Many of the weakest players from a credit perspective are owned by private equity firms, which often borrow huge sums of money to buy the company and then use the cash it generates to pay back the debt.
Bond ratings are put into two broad categories — investment grade for stronger companies and speculative or “junk” grade for those seen as potentially having more trouble paying off their debt.
Under Moody’s scale, companies with a Caa rating are “judged to be of poor standing and are subject to very high credit risk,” while B-rated companies are seen as carrying “high credit risk.”
And more companies are seen as defaulting, which could be through bankruptcy or some debt exchange Moody’s views as a default. In less than a month, the debt watchdog’s forecast for defaults in the U.S. retail and apparel space has nearly tripled.
“We project the default rate for speculative grade retail and apparel companies will surge to 17.2 percent by April 2021 from today’s 12.4 percent, which puts it on par with the previous 2018 peak of 17 percent and significantly above our prior call in March for the default rate to be a relatively tamer 6.34 percent,” Moody’s said.
The strains of the coronavirus are seen as leading to “accelerated Darwinism,” as Moody’s put it.
“We will see the aggressive competitive trends that were permeating the retail landscape prior to the coronavirus intensify once the crisis has passed,” the rating agency said. “The larger competitors will double down on efforts to grab more market share and increase their e-commerce penetration. These larger, stronger and more diversified players will emerge emboldened as increasing numbers of the smaller, weaker, highly leveraged competitors fail.”
Moody’s Investors Service sees increased risk of default for retailers with weak credit ratings. Companies with a rating of Caa or lower are judged to be of “very high credit risk.”
|99 Cents Only Stores||Caa1||Stable|
|Ascena Retail Group Inc.||Caa3||Negative|
|J.Crew Group Inc.||Caa3||Negative|
|Neiman Marcus Group||Caa3||Stable|
|J.C. Penney Co. Inc.||Caa3||Stable|
|Rite Aid Corporation||Caa1||Negative|
|Source: Moody’s Investors Service|