Bonds of French clothing chain IKKS Group SAS fell to the lowest in more than a year after S&P Global Ratings cut the company’s rating further into junk.

IKKS’s 320 million euros ($353 million) of bonds due in July 2021 fell 3 cents on the euro to 90 cents, pushing the yield up to 9.3 percent, according to data compiled by Bloomberg. S&P downgraded the retailer’s rating by one step to B-, six levels below investment grade because of reduced earnings expectations. 

Weaker earnings in the future will probably lead to less free operating cash flow and IKKS may struggle to avoid breaching covenants on its revolving credit facility, S&P said. IKKS reported a 33 percent slump in earnings in the fiscal first quarter due to a weaker economy, online competition and poor weather, according to a CreditSights report.

“People are becoming a bit wary of the company,” said George Flynn, senior credit analyst at Pictet Asset Management SA in Geneva. “They will need to manage their inventory and watch the number of markdowns on their stock in the second half.”

Marie Ferre, a spokeswoman for IKKS, didn’t immediately respond to an e-mail and phone call seeking comment on the company’s declining earnings and possible renegotiation of covenants.

IKKS reported earnings before interest, tax, depreciation and amortization of 11.5 million euros in the first quarter, down from 17.1 million euros a year earlier, CreditSights said.

“It’s quite a leveraged company, so there isn’t much margin for error,” said Flynn. “We may see the company try to renegotiate covenants.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE