Retail/Restaurant Credit Quality Down for 12th Straight Year

Negative rating changes for U.S. retail and restaurant companies are turning out to be less severe than previously expected for 2009.

Excerpts from Issuer Ranking: U.S. Retail And Restaurant Companies, Highest To Lowest

Nevertheless, the trend is still decidedly down, and this will mark the year as the 12th straight in declining credit quality. Through the end of the third quarter, Standard & Poor’s Ratings Services changed a total of 60 ratings for these two key economic sectors. This is 6.3% less than one year ago for the same period. This year, 71.7% of the changes have been downgrades, compared with 76.5% in 2008. Thus, the downgrade-to-upgrade ratio actually receded to 2.53 to 1 from 3.27 to 1 one year ago. This is surprising, because we had expected 2009 could be relatively worse than 2008.

We attribute this in part to the intense downgrade activity in the fourth quarter of 2008, but also to the fact that the vast majority of retailers and restaurant companies managed to cut expenses deeply enough to preserve margins or limit margin erosion by a lot more than we expected.

Another key factor was the success with which companies refinanced debt and arranged covenant relief, even when the financial markets were in turmoil. We believe this helped limit the number of downgrades and the number of bankruptcy filings by rated companies.

Wal-Mart (WMT) is the top ranked public company in S&P’s list of 125 retail and restaurant businesses (AA/Stable/A-1+/Excellent Business Risk/Minimal Financil Risk)
Eddie Bauer Holdings (EBHI) is the lowest (D/–/–/Vulnerable/Highly Leveraged). Chili’s restaurant operator Brinker International (EAT) at 28th is the lowest-rated investment grade company (BBB-/Stable)./–/Satisfactory/Significant.

Saks (SKS) at 115th is the lowest with a rating above C (B-/Negative/–/Weak/Highly leveraged). JPMorgan analyst Charles Grom on Sep 30 downgraded Saks to “neutral” from “overweight.” The same day S&P said the announcement that Saks plans to issue $100 million common equity has no immediate impact on the company’s rating or outlook. “We view the issuance of equity as a positive, as it adds to Saks’ liquidity, but not enough so as to influence the rating or outlook.”

[The National Retail Federation Tuesday forecast a decline of one percent in US retail sales in the upcoming holiday season, which does not augur well for credit quality.]