Daily News: January 10, 2012

Fitch Publishes Analysis of U.S. High-Yield Retail Sector Issuers


Fitch Ratings published its first edition of the “High-Yield Retail Checkout,” a 300-plus-page report that provides a comprehensive analysis of the leveraged finance retail sector.

The report profiles 25 high yield retailers across various sub-sectors of the industry. Each company report includes Fitch’s assessment of the business and financial profile, as well as key selected financial data, a detailed debt organizational chart and covenant analyses.

Against the backdrop of the retail industry characterized by minimal growth and heavy competition, several names continue as best-in-class operators with strong category leadership of their respective sub-sectors. These include: Neiman Marcus, Inc., Hanesbrands, PVH, Limited Brands, Sally Beauty, Toys ‘R’ Us, Michaels, Dollar General, GNC and NBTY. Conversely, credits where negative same-store sales suggest continued slippage in market share include Sears, Bon-Ton, RadioShack Corp. and SUPERVALU Inc.

In general, Fitch believes near-term liquidity (cash and credit facility availability) remains adequate to address the key fixed obligations of the majority of the high-yield issuers. One notable exception is Sears, which is seeing its liquidity profile worsen as it continues to burn free cash flow (FCF). Liquidity is expected to remain adequate to fund 2012 working capital needs given current availability under its credit facilities and assuming no material change in vendor terms. However, Sears may need to access external sources of financing to fund operations in 2013 and beyond as EBITDA is expected to turn negative in 2012.

Fitch noted other weak FCF generators among the 25 issuers include Rite Aid, Bon-Ton, Gymboree and Yankee Candle, either due to weakening operating trends or aggressive leverage and hence a heavy interest bill.

For a select few companies such as Rite Aid and Bon-Ton, the ability to refinance significant debt maturities over the next two to three years is a key rating concern. Both names will require improved operating performance and receptive capital markets to be in a better position to achieve their refinancing needs.

Many companies within the 25-member set reflect the LBOs of the 2005-2007 era, as well as a few from the more recent period. The names with the best opportunities to deleverage are NBTY, Michaels Stores, Inc. and Neiman Marcus. Those less likely to make a material downward dent in their leverage include Claire’s, Yankee Candle and Gymboree.

To read the Fitch Ratings’ report in its entirety, click here.