Sizzle/Fizzle

Signatures Sizzle (Because They Fizzle) And Retail Defaults Alarm

signature sign

The first quarter of 2018 was a record breaker for retailers – but not a good one, as retail set a record for defaults. And that was one of many big fizzles this week – with Facebook founder Mark Zuckerberg getting drilled on the Hill and Theranos back in hot water. But there was good news, too – transactions are going sig-free and India eCommerce is exploding.

It was a record-breaking first quarter for retailers in the U.S. and around the world – but unfortunately, they were not the kinds of records that any business really wants to break.

According to a report issued by Moody’s earlier this week, the retail sector managed to notch a record number of defaults during Q1 2013, with nine retailers defaulting on their debt. The falloff comes during another otherwise healthy economic period, and has largely been chalked up to the rise of eCommerce (and the resulting fall of the mall). Moody’s specifically cited the “fallout of changing consumer behavior and advancing eCommerce for traditional brick-and-mortar retail.”

“Stresses in the retail sector have weighed on the operating earnings of department stores, discount stores and drug stores in particular,” Sharon Ou, a Moody’s senior credit officer, said in the report.

The default count was small in January, with only one reported, but both February and March “overperformed” with each reporting four defaults. They weren’t quite the biggest months – they are in a three-way tie for first with December of 1998, which also saw four retail sectors default.

But the nine new defaults on the list now go up on the scoreboard with the 13 retail bankruptcies logged in in 2017.

As a result of the series of retail fails, the default rate of high-risk U.S. corporate borrowers has increased to 3.9 percent, compared with 3.4 percent at the end of 2017, according to Moody’s.

“A year ago, we noted that 14 percent of retail debt issuers were distressed and predicted that both the U.S. and European retail sectors would have the highest one-year default rates among all corporate sectors,” analysts at Moody’s noted. “By the end of 2017, there had been 13 retailer defaults for the year, second only to the oil and gas industry.”

Those oil and gas industry defaults, Moody’s noted, were explicable given the ongoing slump in crude prices since mid-2014. That, however, has recently stabilized a bit, which means forecasts in that subsector of energy have also improved.

Retail’s outlook, on the other hand – particularly for large, legacy brands like Sears – is predicted to have a bit more darkness left before its dawn.

Sears, for example, has been locked in a very active battle to avoid bankruptcy for the last several years, moving to refinance nearly $500 million in debt last month (as well as selling some of their stores online). However, that did not move the credit rating agencies, which ruled the deal a “distressed exchange” (essentially a default).

And, particularly for U.S.-based firms, taking on new debt is getting expensive. As the Federal Reserve has spiked rates over the last 24 months, short-term borrowing costs have markedly increased. That could create financial headaches for companies that need new loans, as well as those that have taken on floating-rate debt, where interest expenses rise with rates – not at all auspicious when there is already a sizeable amount of debt in the market: According to other reports, as of Q3 2017, corporate debt relative to GDP was at an all-time high.

And according to Moody’s, some big retailers have some big debts coming due soon. The credit rating agency is expecting retailers’ maturities to spike to $5.9 billion total in 2019, meaning that firms including Sears, Neiman Marcus and Guitar Center will have some very significant sums to pay back.

These companies are also targeted as ones that could struggle to refinance or fund their loans in a world where retail is rapidly looking like a risky investment.

There is, of course, a lot of 2018 left, and the retail picture in the U.S. is always changing, sometimes quite dramatically.

But setting a record for defaults in a quarter going into a cycle of a lot of debt coming due?

Not exactly a Sizzle.

Sizzle

Financial firms in China: A trade war may or may not really be in the offing – but China appears to have stepped back a bit, and its president has repeated promises to open up markets. Among them, according to the central bank: Financial markets this year. Extra revenue sources for big banks? Ownership caps are being rolled back, so maximum stakes now will be 51 percent, and ceilings disappear in three years. Open markets, yes, and perhaps we will see some open purses (of the acquisitive kind) moving forward.

Bye-bye, sig: No signatures on debit/credit card transactions via Mastercard as of today, April 13, removing a pro forma that no one was really doing or looking at anyway. A full-fledged nod, finally, to gathering speed at the POS – and how much millennials hate cursive.

India commerce: Gets a nod and a bid from Walmart, maybe. Or … could be Amazon.  Rumors swirl around the financial trade press, where the two commerce giants are said to be inching toward taking a majority stake in Flipkart – Walmart, it is said, by the end of June. The opportunity beckons in a $200 billion market.

Fizzle

Facebook, of course: Mr. Zuck went to Washington, and it wasn’t pretty. But you probably read all about it in your newsfeed – or ours. In case you missed it, the data leak tally has swelled to a blistering 87 million users, and the backlash is … lashing. And all the while, the calls for regulatory action grow louder. From Facebook … to FacetheMusic?

Sears: How the mighty have fallen. Now you can buy a Sears store online. Talk about a fire sale. As many as 16 stores are being auctioned off, as bricks and mortar finally give way, in the ultimate way, to clicks.

Theranos: The blood testing company faces more bloodletting, as layoffs continue – and really, there’s nothing left to bleed out. The company let go of almost all of its remaining staff in an effort to keep bankruptcy at bay for a few months.

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