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Announcement:

Moody's: Number of distressed US retailers triples since the Great Recession; debt levels up

27 Feb 2017

NOTE: On April 11, 2017, the press release was corrected as follow: In the headline, “Depression” was changed to “Recession.” Revised release follows.

New York, February 27, 2017 -- Over the past six years the number of US retailers on the lowest and distressed tier of its rating spectrum has tripled, Moody's Investors Service says in a new report. Not since the 2008-09 recession has the percentage been so high, and the rising tide coincides with an increasing number of such companies across all industries.

"Moody's-rated US retailers rated Caa or Ca today make up just over 13% of our total rated retail portfolio, which is the highest level since the Great Recession, when this group comprised 16% of the portfolio," said Moody's Vice President Charlie O'Shea. "And the increase comes at the same time as the broader universe of Caa rated companies is likewise growing."

This situation comes on the heels of a protracted period of low interest rates, when the availability of cheap money serves as a "dinner bell" for sponsors to feast on target companies, O'Shea says in "Distressed Retailers Are on the Rise; Who's Next?" Each such cycle begets a new pool of B2 or B3 rated companies, which don't have far to fall into the lowest rating tier. Among companies, Claire's, J Crew, Tops and rue21 have all been hamstrung with weak credit metrics after taking on high levels of debt to fund acquisitions.

And while the number of low-rated retailers is growing, so are debt maturities, Moody's says. The 19 Caa/Ca companies in the agency's retail portfolio owe roughly $5 billion in debt through 2021, with about 40% of this due by the end of 2018 and a spike during 2019. While the credit markets remain open to companies up and down the rating spectrum, that could change abruptly if investor sentiment turns. Among other considerations, interest rates have begun to trend upward, while US speculative-grade companies have a record $1 trillion of debt coming due in the next five years, which could make refinancing much more difficult for distressed names.

Meanwhile, a larger pool of low-rated retailers also poses challenges for their stronger competitors. "As they struggle to survive, distressed retailers can take more desperate measures, including highly promotional pricing that can border on irrational," O'Shea added. "This leaves stronger firms with the choice of either competing in a race to the bottom, or giving up sales in order to preserve margin."

And as companies under stress continue their downward spiral, liquidation and going-out-of-business sales inevitably follow, putting even more pricing pressure on their healthier competitors.

Moody's research subscribers can access this report at

https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1057974.

NOTE TO JOURNALISTS ONLY: For more information, please call one of our global press information hotlines: New York +1-212-553-0376, London +44-20-7772-5456, Tokyo +813-5408-4110, Hong Kong +852-3758-1350, Sydney +61-2-9270-8141, Mexico City 001-888-779-5833, São Paulo 0800-891-2518, or Buenos Aires 0800-666-3506. You can also email us at mediarelations@moodys.com or visit our web site at www.moodys.com.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

Charles O'Shea
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Janice Hofferber, CFA
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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