Dive Brief:
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Private equity firms saddled with investments in struggling retailers have sent bonds to distressed levels, a sign that many retailers’ backers view their long-term prospects dimly, the Wall Street Journal reports.
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Bonds in J. Crew Group Inc. fell to $0.27 as of Friday, while Nine West Holdings Inc. fell to $0.23, according to MarketAxess data cited by the Journal. Both were more than 70% below where they issued in 2015. Similarly, bonds in Claire’s Stores Inc. have lost some 39% to about $0.60, bonds in Gymboree Corp. have fallen 32% to $0.26, and some Toys “R” Us. bonds fell fell to $0.69 in mid-December before recovering to about $0.82, according to the Journal. The paper notes that other retailers face similar challenges.
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While these retailers aren’t in danger of default, a common reason for plunging bond prices, they’re also increasingly deemed as unable to recover from their financial and competitive struggles any time soon, leaving their backers without the ability to sell off their investments or realize returns through a public offering. As Jim Zenni, CEO of private-equity firm Z Capital Partners LLC, which invests in distressed companies, told the Journal, “There are very limited ways out of the room.”
Dive Insight:
Pressure from e-commerce, changing tastes, and changing spending priorities, plus limited wage growth even in a healthier economy that continues to limit spending, has left several retail companies struggling to turn themselves around. And that has left their backers with little wiggle room.
While many of the firms backing some of the retailers that the Journal looked at wouldn’t comment to the paper, the bond prices tell the story.
Banks, meanwhile, have recently shied away from funding buyout deals that incur debt of more than six times earnings before interest, taxes, depreciation and amortization (EBITDA). Yet teen accessories retailer Claire’s, bought by Apolla in 2007, and children’s clothing retailer Gymboree, taken private by Bain in 2010, each carry debt levels well beyond that, according to the Journal, citing Moody’s Investors Service.
With banks reluctant and borrowing more difficult (which the Federal Reserve could complicate further if it raises its rate again), retail bankruptcies could increase.
“Given the lack of liquidity in the credit markets, the overall level of debt on many retail companies and the changing ways in which consumers shop, we expect retail bankruptcies to rise sharply in 2016,” Soren Reynertson, managing director at investment bank GLC Advisors & Co., told the Journal.