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Moody’s Sees Retail Credit Strain Lasting Into 2010

Moody’s Investors Service said credit conditions will continue to worsen for retailers.

Despite some signs — or perhaps hopes — that consumer spending has bottomed out, Moody’s Investors Service said credit conditions will continue to worsen for retailers in the next 12 to 18 months.

This story first appeared in the May 6, 2009 issue of WWD.  Subscribe Today.

“With the economy in recession and consumers in retreat, our negative outlook on the U.S. retail industry shows no signs of stabilizing anytime soon,” said Moody’s in an analysis released Tuesday. The debt rating agency said about 40 percent of the retailers it tracks have a negative credit outlook or are on review for possible downgrade.

On the other hand, Federal Reserve chairman Ben Bernanke told Capitol Hill lawmakers Tuesday recent economic data show the pace of the contraction might be slowing. J.C. Penney Co. Inc. and other retailers have also cautiously pointed to signs of improvement in their stores.

“In coming months, households’ spending power will be boosted by the fiscal stimulus program, and we have seen some improvement in consumer sentiment,” said Bernanke, who continues to expect the economy to bottom out and then turn up later this year.

Qualifying his remarks, he said spending will continue to be pressured by weakness in the labor market — the U.S. has lost more than 5 million jobs since the recession began — as well as declines in the equity and housing markets and tight credit conditions for consumers.

Economists are concerned the stimulus, billions of government dollars intended for job creation, will cause an inflation problem down the road even if it does help get the economy growing again.

Still, if Bernanke was seeing the glass as half full, Moody’s saw it as half empty.

“We expect a lot of bad news in the year ahead,” said the debt watchdog. “Nearly 20 percent of retailers are rated ‘Caa1’ or lower, indicating our view that the number of defaults in the retail industry will rise.” A rating in the “Caa” category indicates a company’s debts are “subject to very high credit risk” and are judged to be in poor standing.

Of the eight types of retailers tracked by Moody’s, specialty and department stores were deemed to be most vulnerable to credit risk, while drugstores were most secure.

“Most at risk are companies that sell expensive products people aspire to own but don’t need, such as specialty retailers, like jewelry stores, and high-end department stores,” Moody’s said. “A long-term change in shopping patterns away from these types of stores would deal a further blow to their credit profiles, which are already speculative-grade.”

Many specialty retailers have fragile capital structures, heavy interest burdens and little room for operating error, Moody’s said.

The debt-rating firm noted that most, but not all retailers, should have adequate liquidity over the next 12 months.

For their part, investors pushed retail shares up 0.3 percent Tuesday and are waiting for more definitive statements on the performance of stores and the economic health of households. Retailers report April sales result on Thursday, with the government’s unemployment data for the month to be released on Friday.

The S&P Retail Index rose 1.04 points to 342.10 — up more than 53 percent from the index’s March 6 low. The Dow Jones Industrial Average dipped 0.2 percent, or 16.09 points, to 8,410.65.