The retail industry has been shedding its weakest links for a some time now, and that’s a good thing in some ways. Bankruptcies have reduced the pool of Moody’s Caa1 and lower-rated retail and apparel issuers from 26 in December 2017 to 17 currently. But refinancing also comes with great risks. Just take Toys R Us for example, which ultimately liquidated last year.
“The Toys lesson here is that as an issuer’s credit profile weakens, its lender group will likely change, devolving from a group of lenders with a common goal to one that can include distressed lenders who have purchased the debt at a discount, or the ‘loan-to-own’ lender, who ultimately hope to seize control of the ownership of the company,” Moody’s analysts wrote in the report, adding that Toys stands as a reminder of vendor risks.
