The end of third quarter 2017 data from American retailers has recently been announced. It sounded highly positive. For the first nine months of the year, over 3,000 new store openings happened across America. Normally this would be promising news.
The problem is that at the same time, the chains across the country announced that 6,800 stores would be closing. It represented a net loss of 3,800 store locations at a time when the economy is supposed to be growing. Consumer confidence is reported extremely high while the official unemployment rate shows historically low figures.
Yet despite the fact that the U.S. economy is still officially expanding, a greater number of chains have filed for bankruptcy than did in the worst point of the global financial crisis from a decade ago. More chains are also rated as in distress now than in 2007-2009. Some of the effects of this are already showing up in the form of rising late payments from shopping centers and malls around the country.
It would be easy to blame Amazon for stealing their market share, but the root of the problem is something more dangerous. A great number of these venerable chains were over saddled with debt. Some of this came from irresponsible corporate borrowing. More of it came from private equity firms and their leveraged buyouts. The PE firms passed the debt they took on along to the companies they took over.
These debts now amount to billions on struggling retailers’ balance sheets. Many of them like Toys ‘R Us, Payless Shoes, and Sports Authority have already fallen to bankruptcy, shuttering thousands of stores in the process. Yet for other companies that are still managing, the hardships of handling their mountains of debt are about to get worse.
Up to this year, those retailers who struggled could stave off bankruptcy through refinancing. Yet now with interest rates rising and the sentiment towards retail shifting, banks are thinking twice about loaning them money again. Consider the case of Toys R’ Us. When it stunned analysts and investors with its September bankruptcy filing, its profitability was still rising on top of generally stable results. Yet it could not refinance only $400 million worth of the company’s $5 billion total debt.
Unfortunately, the situation of rising bankruptcies throughout retail looks set to grow even worse over the coming five years. Across all retail industries during this time, a total of a trillion in high yield debt is maturing per Moody’s. This will coincide with tightening credit markets that are not so eager to loan to corporate borrowers in distress. Who will be holding the bad debt on their shuttered properties? This chart below gives an idea of exposure to retail real estate:
Is Your Retirement Portfolio Protected from the Trend of Retail Store Closures?
This distressed corporate debt which is coming due between now and 2022 threatens all parts of the economy. There are many repercussions of closing stores and malls. It is not only the banks holding the debt. Tax bases will be reduced for local governments. Lower income workers will lose desperately needed jobs. Investors in affected real estate, bonds, and stocks will take losses. Today some call this a retail apocalypse already, but it is only getting started.
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