Sears Holdings Corp. stands out in the retail debt junkyard.
The struggling chain was one of the most pressured firms on Fitch Ratings’ list of 25 retailers with junk credit scores. Sears is rated “CCC” — indicating default is a real possibility — and has total adjusted debt of $11.7 billion, and its rating outlook is negative. Of the 12 companies in the analysis that Fitch officially rates, Sears received the lowest grade.
“Sears is seeing its liquidity profile worsen as it continues to burn [free cash flow],” said Fitch in the first installment of its “High Yield Retail Checkout.” “Sears may need to access external sources of financing to fund operations in 2013 and beyond, as the magnitude of the decline in profitability and lack of visibility to turn operations around remain a major concern.”
Fitch said there was a “heightened risk of restructuring over the next 24 months” if Sears is unable to borrow money and if earnings before interest, taxes, depreciation and amortization don’t improve.
After a weak holiday season, Sears said it would close up to 120 stores and take steep charges in the fourth quarter.
Sears is not the only company feeling debt pressure. Fitch said both The Bon-Ton Stores Inc. and Rite Aid Corp. face refinancing concerns as their debt matures over the next two to three years. Both companies are rated “B-minus,” indicating that the companies’ abilities to pay their debts is contingent on favorable business conditions.
Many of the retailers on the list are the product of leveraged buyouts, where private equity firms borrowed to take the chains private and than transferred that debt to the company. Claire’s Stores Inc., which Apollo Management took private in 2007, has a lease-adjusted leverage ratio of 8.6 times. “In order to grow into its capital structure over the next few years and improve to a more tolerable seven-times-leverage area, Claire’s would have needed to post annual growth of about 4 percent and see margins improve about 100 [basis points] to 2007 levels of 19 percent,” Fitch said.
Junk bonds attract investors who are willing to accept the risk associated with heavily indebted or struggling companies in return for a bigger payout over the life of the debt. Stronger companies with investment grade credit ratings don’t have to pay as much to borrow and have an easier time accessing funds to feed their businesses.
Macy’s Inc., for one, has seen its star rise.
Moody’s Investors Service upgraded the department store’s credit rating to “Baa3” from “Ba1” — pushing Macy’s score out of junk territory and into investment grade. Fitch Ratings and Standard & Poor’s already also have investment grade ratings on the firm.
About $7 billion of debt was covered under Moody’s upgrade, which could make it easier for the company to borrow money.
“Macy’s clearly outperformed during the holiday 2011 season, and we believe this higher level of earnings is sustainable,” said Maggie Taylor, senior credit officer at Moody’s. “However, we do expect the rate of earnings growth at Macy’s to slow in 2012.”
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