There were more signs
of a retail apocalypse in the first quarter
of this year.
Defaults by retail companies
rated by Moody’s hit an all-time high in Q1. There were a total of nine
defaults among Moody’s-rated retail corporates. According to Wolf Street, total corporate defaults in Q1 were up 22%
from last year, and the nine retailer defaults accounted for nearly 1/3 of them.
As Wolf Street put it, these are not mom-and-pop
stores. These are retailers large enough to be rated by Moody’s – “corporations
that make up the core of the Brick-and-Mortar Meltdown.”
Here
are some of the retail companies that defaulted during the first quarter.
- Sears
Holdings
- Claire’s
- Bon-Ton
Stores
- The
holding companies that hold Tops Markets, a grocery chain in New York,
Pennsylvania and Vermont
- Charlotte
Russe, a women’s clothing retailer
Of
course, default doesn’t necessarily mean bankruptcy. Some of these companies
may be able to restructure their debt and prosper. But several of these
corporations have already declared bankruptcy, including Sears, Clarie’s and
Bon-Ton stores. More significantly, the high number of defaults reveals serious
problems in the retail sector – and the broader economy.
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The
second quarter didn’t start off any better. Last week, Nine West Holdings
declared bankruptcy with $1.6 billion in loans. The company owns a number
of well-known brands, including Nine West, Anne Klein, Gloria Vanderbilt
and Bandolino.
Fitch Ratings’ trailing
12-month institutional loan default rate of retailers rose to 8.6%,
with $5.9 billion in loans now in default. Fitch paints a gloomy picture.
Our
retail sector institutional term loan default rate forecast is 10%, equating to
$7 billion of volume, which would surpass the 8.2% rate the sector set in 2017.
Fitch anticipates more large retail chains to file bankruptcy this year. Ten
percent of the retailers in Fitch’s market index are listed on Fitch’s Top
Loans of Concern list, indicating a material default risk. These retail chains
include: Neiman Marcus Group, Sears Holdings, FULLBEAUTY Brands, David’s
Bridal, TOMS Shoes, Indra Holdings, Everest Holdings, Things Remembered, NYDJ
Apparel and Vince.”
As Wolf Street put it:
So
this process of the brick-and-mortar meltdown that has already caused so much
pain among employees, pension beneficiaries, creditors of all kinds,
shareholders, mall owners, shoppers, and other stakeholders is far from over.”
Moody’s
echoed the typical mainstream theme, blaming the woes of brick-and-mortar
retailers on a shift toward online shopping. The rating agency said the rising
level of retail defaults is “reflecting the fallout of changing consumer
behavior and advancing e-commerce for traditional brick-and-mortar retail.”
But
while it is certainly a factor, we can’t blame Amazon for the retail meltdown.
The big story is debt.
The story behind the Toys R Us bankruptcy gives
us a glimpse at a fundamental problem eroding the strength of the US economy –
easy money created by Federal Reserve monetary policy. The ability to borrow a
lot of money at low interest rates fuels borrowing and speculation.
Malinvestment distorts the economy and inflates bubbles that eventually pop.
Over
the last 20 years, the Fed has inflated and maintained a giant retail bubble.
All of that debt is beginning
to come due. In an in-depth report published last fall, Bloomberg reported that $1.9 billion in high-yield
retail borrowing will come due in 2018. And from 2019 to 2025, the debt coming
due will balloon to an annual average of almost $5 billion.
The
amount of retail debt considered risky is also rising. Over the past year,
high-yield bonds outstanding gained 20 percent, to $35 billion, and the
industry’s leveraged loans are up 15 percent, to $152 billion, according to
Bloomberg data. Even worse, this will hit as a record $1 trillion in high-yield
debt for all industries comes due over the next five years, according to
Moody’s. The surge in demand for refinancing is also likely to come just as
credit markets tighten and become much less accommodating to distressed
borrowers.”
There’s
another big problem for the retail sector – a problem even Amazon can’t escape.
Household debt has surged to record levels.
Americans have maxed out the credit cards.
In other words, the struggles
in the retail sector reveal deeper cracks in the overall economy. We are over-leveraged and interest rates are
going up. This doesn’t bode well for the future.
Reprinted from SchiffGold.com.
Peter
Schiff is president of Euro Pacific Capital and Chairman of Euro Pacific
Precious Metals. He is author of The Little Book of Bull Moves in Bear Markets and Crash Proof: How to Profit from the Coming Economic
Collapse. His latest book is The Real Crash: America's Coming Bankruptcy, How to Save
Yourself and Your Country.
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© 2018 SchiffGold.com
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