Credit analysts at Moody’s are worried about unsustainable capital structures at some leading retailers — but the companies contend any problems are at least two-to-three years down the road.

The credit ratings agency said highly leveraged retailers are facing increased refinancing risk when their debt starts to mature. It concluded that “high leverage and weak operating performance” will increase the refinancing risk for retailers having a credit rating of “B3 negative and below.”

In a report titled “Sorting Through the Discount Rack,” those cited by Moody’s as having a “B3 negative” rating are Charlotte Russe Inc.; Charming Charlie Inc.J. Crew; Payless and Toms Shoes Inc. Others on the list below “B3 negative” with a “Caa1 stable” rating are Bon-Ton Stores Inc., Nine West Holdings, NYDJ Apparel LLC and True Religion Apparel Inc. Sears Holdings Corp.  and David’s Bridal Inc. are rated “Caa1 negative,” while accessories retailer Claire’s Stores Inc. is rated “Caa2 stable.”

Of the retailers listed above, only two — Bon-Ton and Sears — are public companies. The rest are owned by private equity firms.

Raya Sokolyanska, vice president and senior analyst, said, “Highly leveraged retailers have limited resources to address the industry’s structural headwinds, including declining mall traffic and rising competition from e-commerce, fast fashion and off-price.”

Sokolyanska noted that many are working to fix company-specific execution challenges such as fashion misses, brand perception and product and pricing missteps. Still, those with “unsustainable capital structures could ultimately undergo a restructuring or other default event,” she concluded.

The analyst also estimated that companies on the list have a “two-to-three year runway until their nearest meaningful maturities.” Her concern is that the “debt will mature at a time when credit spreads could widen relative to when the retailers last refinanced, and leveraged lending guidelines [make it] more challenging to refinance aggressive capital structures.”

Moody’s in the report also said that those with “unsustainable capital structures could ultimately undergo a restructuring or other default event. Others may be forced to refinance at a more onerous cost, contributing to further credit deterioration.”

Of the companies that WWD reached out to for comment — either the companies directly or the firm’s financial sponsor — nine declined comment: David’s Bridal, J. Crew; Sears, Advent International, which owns Charlotte Russe; Apollo Management, which owns Claire’s Stores; Golden Gate Capital, a cosponsor of Payless; TSG Consumer Partners, a cosponsor or Charming Charlie; Sycamore Partners, which owns Nine West, and Nine West.

In the case of Nine West, an individual connected to the company emphasized that the time frame for the nearest maturity is closer to the three-year period, not two. A spokesman for Sears noted that its $750 million senior secured term loan facility is expected to close on April 8, which will result in $720 million in net proceeds for use to reduce borrowings under its asset-based revolving credit facility.

Executives at the other companies either could not be reached for comment or did not return a request for comment.

In its analysis of 19 retailers facing a combination of declining operating performance, unsustainable capital structures, approaching maturities and other liquidity pressures, Moody’s focused primarily on the ability to make interest payments and upcoming debt maturities, since those are the two key credit considerations.

It expects 2016 earnings before interest, taxes, depreciation and amortization to be up for four retailers: David’s Bridal, NYDJ Apparel, Payless and Toms. Moody’s projected 2016 EBITDA to be flat for six others: Sears, Bon-Ton Stores, Charlotte Russe, Nine West, J. Crew and Charming Charlie. EBITDA is expected to be down at two retailers, Claire’s Stores and True Religion.

For each company on the list, Moody’s analyzed both the issues it faces and the business factors the agency is keeping tabs on – which is more or less its recommendations on where improvements could be made. That’s because credit risk includes other considerations such as qualitative business characteristics, free cash flow generation, revolver availability and alternate liquidity, Moody’s said.

Claire’s, owned by Apollo since 2007, faces difficult mall traffic trends and economic headwinds in Europe, but could avoid distressed exchange through growth in earnings from a shift to “off-mall,” expansion of its concession format and e-commerce growth.

In the case of True Religion, owned by Towerbrook Partners since 2013, adverse denim trends and brand perception challenges impacted revenue and led to EBITDA declines in 2014 and 2015. Increasing the brand’s relevance to a broader audience and refocusing on the premium denim segment, as well as diversifying the supply chain and shifting sourcing to outside the U.S. for outlet and non-denim products, could stabilize earnings and generate positive cash flow, Moody’s said.

While Sears faces an untenable capital structure and sizable cash burn — projected at $1.6 billion in 2016 — as well as a lack of clear catalysts for meaningful profit improvement, Moody’s said a mitigating factor is the retailer’s owned-asset base, which includes 419 locations.

Moody’s in its report said that declining same-store sales and operating margins hurt Bon-Ton’s ability to invest in areas such as technology and real estate, while the retailer is underpenetrated in e-commerce compared with larger competitors. If Bon-Ton can execute on initiatives such as localization and e-commerce and meeting customer demands through its new e-commerce fulfillment center that would help to drive higher revenues.

Regarding J. Crew, owned by TPG and Leonard Green since 2011, the ratings agency said it would keep an eye on the company’s ability to attract customers after fashion misses in a highly promotional environment, as well as increased competition from fast fashion and off-price.

Charlotte Russe, owned by Advent International since 2009, has been hurt by declining mall traffic trends, product acceptance issues and higher markdown rates. Stabilizing factors could include the ability to reverse negative comps trends and re-establish margins while maintaining adequate liquidity, Moody’s said.

For Nine West, a part of Sycamore’s portfolio since 2014, Moody’s cited challenges in the brand’s moderate department store customer base, as well as fashion miscues in footwear and poor trends in women’s denim. The agency said it would keep tabs on whether the company can improve operations by reducing costs, such as excess real estate.

Moody’s said it expects earnings improvement at David’s Bridal and Payless, but that “may still not be sufficient to achieve meaningful deleveraging in time to lower refinancing risk.”

For David’s Bridal, owned by Clayton, Dubilier & Rice and Leonard Green since 2012, Moody’s said it will watch whether the retailer can “grow into the capital structure,” such as through more frequent $99 dress sales, a broader dress selection, improved service and execution in accessories. In the case of Payless, owned by Golden Gate Capital and Blum Capital since 2012, the rating’s agency said the key would be its ability to improve earnings against a backdrop of ongoing foreign exchange and mall traffic headwinds, as well as whether it can moderate promotional activity.

While neither Charming Charlie nor NYDJ faces near-term maturities, liquidity is weak due to the high likelihood of a covenant violation, Moody’s said.

For Charming Charlie, co-owned by its founder and private equity firms TSG Consumer Partners and Hancock Park Associates, improving store traffic trends and comps growth plus a re-establishment of margins could help avoid a covenant violation. At NYDJ, owned by private equity firm Crestview Partners since 2014, Moody’s said it would watch the company’s ability to grow earnings and cash flow by leveraging the stabilization in denim trends and expansion of the non-denim assortment.

And at Toms, co-owned by its founder Blake Mycoskie and Bain Capital since 2014, Moody’s said the factors to keep an eye on are whether the company can profitably diversify outside the core alpargata products and generate strong returns on advertising and product development to turn around its operating performance and generate positive free cash flow.

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