Dive Brief:

• Despite strong holiday sales across much of the industry, analysts with ratings agency S&P Global still have a negative view of the retail sector and cautioned that defaults could  “could match or exceed” those in 2017, when retail bankruptcies surpassed the recession period.
• To date, S&P has issued 11 credit downgrades for retailers, with three defaults, and has negative outlooks for 34% of the sector it covers, according to a report emailed to Retail Dive. In all for 2017, S&P counted 75 downgrades and 11 defaults.
• Analysts led by Robert Schulz pointed to several danger points, including approaching debt maturities ($5.6 billion in 2018 and then $13 billion in 2019), shifting consumer spending, the “dangerous lag” of some retailers behind their competitors, a surplus of stores and highly leveraged balance sheets — dating back to “dozens of private equity buyouts over the past decade.” S&P also said that business liquidations in retail could pick up this year, with Bon-Ton (which filed for bankruptcy in February) being potentially “the first department store to liquidate in a number of years.”

Dive Insight:

As much as retailers might hate or reject the term “retail apocalypse,” it described something real in the world.

There are a lot of retailers out there with heaps of debt — many if not most from private equity buyouts — that don’t have the safety net for changes in mall traffic and shifts to e-commerce. They can’t compete on price or value with discounters and off-pricers, and they haven’t been able to invest in their business.

(Toys R Us, last year’s largest retail bankruptcy and the third largest in history, is a near-perfect case of what has gone wrong for numerous retailers over the past two years.)

Last year saw the orderly reorganization of several retailers in Chapter 11, among them Payless, Gymboree, rue21 and True Religion, all of which entered and exited bankruptcy within the year and made changes to the business they said would better position them for the future.

But that’s not always the case. History favors retail liquidation, and retailers facing bankruptcy need to find lenders and other stakeholders willing to back the business beyond bankruptcy. And those stakeholders need to believe in the business. As the case of Bon-Ton illustrates, there are frequently stakeholders that think a retailer’s inventory and assets are worth more than the business as a going concern.

Changes from the recent tax bill could also cause problems for debt-laden retailers. In a recent report from law firm Arent Fox, authors found that a new cap on interest deductions “will cause distress to highly leveraged retailers.” It could also reduce leverage levels in future private equity buyouts, according to Arent Fox.

That might be good news for the sector, in the long run.