Retailers Are Defaulting at Record Rate

According to Moody’s, US retailers are defaulting on debt in record numbers. Online sellers such an Amazon have been eroding the profits of brick and mortar stores for years, and even large, established retailers are feeling the pinch. People are no longer visiting the mall when they can click on their choice of an item at 3:00 a.m. while in their pajamas. The easy loans available to retailers have made it easy for businesses to acquire a high level of debt, which many are now finding impossible to repay.

Retail giant Sears defaulted on its debt earlier this year. It is only one of many. Consumer retailers who defaulted on their debt made up a third of all corporate defaults as consumers enjoy the convenience of online shopping. In 2017, toy store mega-giant Toys R Us was one of 13 retailers who defaulted on their debts. These stores face the same problems consumers face following a debt default – namely, difficulty in obtaining needed credit to start over.

Although Sears Holdings has successfully restructured its $500 million in debts in March, the debt was still downgraded to default status. Declining mall traffic forced Claire’s, a mall-based piercing and accessory store located throughout the country, to file for Chapter 11 last month as it found itself unable to pay down its huge debt. The Department store Bon-Ton, with stores throughout the Northwest, filed for bankruptcy and is currently awaiting a decision by a group of potential investors as to whether it will be acquired by new owners.

Nine West Holdings, which owns the Nine West chain and Anne Klein brand, also filed for Chapter 11 in April.

The amount of defaulted debt is huge and is at an all-time high. Hopefully, global debts will decline as the economy continues to remain robust and interest rates stay low. The Federal Reserve increased its interest rates earlier this year, which will make it more difficult for these corporate debtors to qualify for loans.

Changes in the way consumers make their purchases has figuratively and literally swung a wrecking ball at brick and mortar retailers, along with creating headaches for mall owners, employees, realtors, and shareholders.

A total of $13 million in retail debt is expected to become due in 2019, which makes it likely that the trend of the debt default by retailers will continue as they struggle to restructure their payments.

The decline of mall stores is great for Amazon and other e-commerce stores, which are expected to account for 15 percent of all retail shopping by 2020.