| NEW YORK
NEW YORK Nov 23 Loan investors are watching the
holiday shopping season for signs of respite as struggling US
retailers, including sporting goods retailer Bass Pro Shops,
face resistance and higher financing costs in the leveraged loan
The Retail Federation is predicting that retail sales in
November and December will increase a solid 3.6% from last year
to US$655.8bn and 'Black Friday' - the Friday after Thanksgiving
- will be the biggest sales day of the holiday season for many
Retail borrowers in the leveraged finance world have been
hammered over the past 18 months as many brick-and-mortar chains
continue to cede business to online sellers.
"Like most sectors, retail remains a 'have and have-not'
story when it comes to performance and access to debt capital,"
a banker said.
Average bids in the retail sector in the US secondary loan
market of just over 95% of face value have been falling since
mid-2015, when average bids were 98.5, according to Thomson
Reuters LPC data.
Retail sector average bids remain well below the average bid
on the SMi100 of 98.64, the data shows.
Retailers such as Toys "R" Us and fashion company Claire's
Stores have been struggling in the leveraged loan and high-yield
bond space for years. Toys "R" Us' term loan due in 2018 is
trading at 95.5 after hitting lows of 70 in January and Claire's
Stores' 7.75% notes due in 2020 are trading at 12.
Threats of a potential economic pullback are not helping,
especially coupled with uncertainty over the economic direction
of the country after Donald Trump beat Hillary Clinton in the US
Bass Pro Shops is the latest big name to run into resistance
in the loan market in November. In October, G-III Apparel Group
had to increase pricing to 525bp over Libor with a 1% floor from
guidance of 450bp-475bp on a US$650m term loan supporting its
purchase of clothing brand Donna Karan.
Bass Pro marketed a US$3.37bn term loan B and a US$500m
asset-sale facility to support its acquisition of hunting and
fishing specialist Cabela's Inc. The company cut the size of a
term loan B to US$2.97bn and increased pricing to 500bp over
Libor with a 0.75% floor from initial guidance of 425bp over
Libor after a weak response.
Pricing on a US$500m loan, which will be repaid by a planned
asset sale, was also increased to 475bp over Libor with a 0.75%
floor after originally being offered to investors at 400bp. The
company also added a US$400m term loan A that was made available
only to relationship banks to cover the decreased size of the
Term loan As are usually held by bank lenders and are more
of a relationship play than B loans that are sold to a broader
set of institutional buyers, including hedge funds, mutual funds
and Collateralized Loan Obligation (CLO) funds.
Bankers and investors said they were not surprised to see
the deal struggle as the retail sector has already seen many
troubled names including American luxury department store Neiman
Marcus and clothing company J.Crew.
Apparel retailers have been hit particularly hard as they
struggle to stay relevant in the fast-changing world of fashion.
J. Crew's term loan due in 2021 is trading at 68.67. The Neiman
Marcus term loan due in 2020 is trading at 91.86.
"There have been a number of high profile names within the
high-yield/levered loan space that have struggled for years,"
said Michael Terwilliger, global portfolio manager at Resource
America, an investment company. "These high-profile struggles -
even among well respected brands such as Neiman Marcus and
J.Crew - will create a very challenging backdrop for retail
credit going forward."
TOO EARLY TO CALL
Political uncertainty has also added to concerns, although
it is too early to say which way things will break under a Trump
administration, say analysts. The president-elect's policy
proposals hint at the potential for the dollar to rise, which
has already had a negative impact on some retailers, according
to a November 9 report from Citigroup.
"Luxury retailers and department stores have been plagued by
weaker tourism spend as the USD has strengthened against most
global currencies," the report said.
However, the potential for lower taxes for both individuals
and corporations could help discretionary spending, the report
also said. Prior to the election, US retail sales came in better
than expected in October, increasing 0.8%.
Even when some deals have been challenging, there are some
individual cases where banks are willing to underwrite for
retailers with a good credit story.
Goldman Sachs agreed to provide the debt to back online
jeweler Blue Nile Inc's US$500m buyout by Bain Capital and Bow
Street, which was announced November 7.
"Clearly there is a receptive audience for proven stories
that have performed through recessions, but generally investors
remain cautious on retail given most believe we are due for an
economic pullback in next 18-36 months," said the banker.
But these are expected to be few and far between until
companies in the sector are able to find a way to make their
businesses more successful.
"It's difficult to envision the market being willing to
underwrite new retail LBOs amid what seems to be rather dramatic
structural changes in the industry," Terwilliger said.
(Reporting by Jonathan Schwarzberg; Editing By Tessa Walsh and