Exterior view of a Bon-Ton store

The first quarter hasn’t ended yet, but credit ratings firm Standard & Poor’s has already concluded that retail “defaults in 2018 could match or exceed last year’s record level of 11.”

S&P said in a report that so far, there have been 11 downgrades and 34 percent of outlooks are negative. It also said it expects “adverse secular trends to continue for issuers in the retail subsectors that have been especially challenging — department stores, specialty apparel and regional grocery.” The outlook for the retail sector remains negative, and S&P said “we are now beyond the tipping point we noted in February 2017 for defaults.”

Robert E. Schultz, the primary credit analyst on the report, said in 2017, there were 74 downgrades and 11 defaults, with 15 of those downgrades occurring in the first couple of months of the year. In comparison, so far in 2018, there are 11 downgrades, which includes three defaults.

“With almost 20 percent of ratings in the ‘CCC’ category, we have a strong expectation for continued defaults over the next 12 months,” the report said. And it noted that while still uncertain, there’s a chance that The Bon-Stores Inc. could become the “first department store to liquidate in a number of years.”

Bon-Ton filed its voluntary Chapter 11 petition for bankruptcy court protection in early February. The company is trying to find a financial sponsor to help fund its reorganization plan.

Many retailers who went out of business last year were either specialty chains that shuttered before filing for bankruptcy or big-box retailers that closed up shop while in bankruptcy proceedings.

The S&P report also noted that the U.S. is still “significantly oversaturated” with retail stores. And while retailers have done a better job aligning their physical footprint with the online channel, “there is still excess capacity,” the ratings firm concluded.

For profitable retailers, “tax reform and a solid economy will buy them time to further align their business models with the future state of the retail environment,” the report said, citing Target Corp., Kohl’s Corp. and Macy’s Inc. as examples of profitable retailers working through the industry’s structural changes.

The report also said it expects that off-price retailers would continue to do better than their full-line department store and specialty apparel counterparts, given that U.S. consumers remain focused on value. It noted that they could become even more entrenched in the value mind-set “in the next recession.”

The S&P report also said that debt levels are expected to rise from $5.6 billion to $13 billion in 2018 and then to $18 billion in 2019 to 2020. It expects that looming debt maturities “will cause companies to consider restructuring sooner, especially in light of the tepid interest in lending to retailers.”

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