Retail Apocalypse: A Sinking Wreck?

Picking up the broken shards from Retail Apocalypse: Shattered? 

Bottom line, no matter whose number you put more credence in, by either 1K, 2K or 4K, the ten year old record for retail closures was SHATTERED in 2017....

Visits to shopping malls have been declining for years, declining by 50% between 2010 and 2013, according to the real estate research firm Cushman and Wakefield.  

Many claim this decline is due to changing shopping habits which reflect technological changes, online, Amazon, etc. IMHO, indeed shopping habits have changed, but not for those haughty reasons... 

It's simple for those who are reality based, viz. not living in a bubble. Most are living from paycheck to paycheck, borrowing on credit cards to make ends meet, consumers have less discretionary income to spend, and are focusing on value, discount shopping and food.

Bearing out that Nattering hunch, what type of retailers are closing? Large retail mall anchors, drug stores, higher end apparel, home entertainment, footwear, children's clothing and toys. Where's your sign? When drug stores, children's clothing and toy stores close, it's not all fun and games.  

What is opening?  Discount dollar stores, fast food, value grocers and discounted apparel. 

A large majority of the retailers that are opening new stores this year are discounters, including Dollar General, Dollar Tree, Family Dollar, Aldi, Lidl, Five Below, and Hobby Lobby.

As $1T of high yield debt comes due over the next five years, how will retail debt fare?

Just $100 million of high-yield retail borrowings were set to mature this year, but that will increase to $1.9 billion in 2018, according to Fitch Ratings Inc. And from 2019 to 2025, it will balloon to an annual average of almost $5 billion. The amount of retail debt considered risky is also rising. Over the past year, high-yield bonds outstanding gained 20 percent, to $35 billion, and the industry’s leveraged loans are up 15 percent, to $152 billion, according to Bloomberg data. 

Even worse, this will hit as a record $1 trillion in high-yield debt for all industries comes due over the next five years, according to Moody’s. The surge in demand for refinancing is also likely to come just as credit markets tighten and become much less accommodating to distressed borrowers.

NIRP, ZIRP, low rates, easy money, investors stretch for yield. With the Fed raising and cost of loan funds rising, demand for those riskier assets declines, and the cost of servicing floating debt rises, while refinancing becomes ever difficult and more expensive. 

With the Fed now raising rates, that [HY] demand will soften. That may leave many chains struggling to refinance, especially with the bearishness on retail only increasing. One testament to that negativity on retail came earlier this year, when Nordstrom Inc.’s founding family tried to take the department-store chain private. They eventually gave up because lenders were asking for 13 percent interest, about twice the typical rate for retailers.

Regional banks and commercial MBS investors are holding this potentially heavy "shopping" bag of full of riskier high yield "anchor" debt.

How heavy is that bag of anchors, and how fast could it make one sink to the bottom?

Many of these long-standing chains are overloaded with debt—often from leveraged buyouts led by private equity firms. There are billions in borrowings on the balance sheets of troubled retailers, and sustaining that load is only going to become harder—even for healthy chains.

And here's the punchline for those holding those heavy shopping bags...

Not only do the malls lose the income and shopper traffic from that store's business, but the closure often triggers "co-tenancy clauses" that allow the other mall tenants to terminate their leases or renegotiate the terms, typically with a period of lower rents, until another retailer moves into the anchor space.  

The nation's worst-performing malls — those classified in the industry as C- and D-rated — will be hit the hardest by the store closures.

The real-estate research firm Green Street Advisors estimates that about 30% of all malls fall under those classifications. 

It's a self reinforcing vortex pulling those bag holders down. Perhaps many large and small mall ANCHORS, CREIT's which are landlords, as well as CMBS holders are getting that SINKING feeling? Que up Gordo's "sunken wreck" classic from 1976...



What does 2018 hold and where could this path lead??  More to come in Highway To Hell? Stay tuned no flippin.

Suggested reading

Bloomberg report with some awesome graphs... 
Retail Apocalypse Just Starting
The retail apocalypse has officially descended on America