Markets

Lisa Abramowicz is a Bloomberg Gadfly columnist covering the debt markets. She has written about debt markets for Bloomberg News since 2010.

Big problems get a whole lot bigger when big debt is involved. 

The prime example is energy companies, many of which borrowed record amounts of cash during the recent commodity boom only to run into trouble as soon as oil prices headed south. But another important one can be found in overly leveraged U.S. retailers, which are struggling in the face of a structural shift in consumers’ spending habits.

Macy’s, for example, the largest U.S. department-store company with about $7 billion of debt outstanding, plunged the most in more than seven years last week after the chain missed third-quarter sales estimates and cut its annual profit forecast. Its bonds had already dropped almost 3 percent in the year leading up to the earnings and kept on falling after that as investors worried about the company’s future viability, Bank of America Merrill Lynch index data show.

It’s not alone. Debt of Bed Bath & Beyond has fallen more than 4 percent in the past year. Claire’s Stores, which tries to sell plastic earrings, headbands and hair-ties to young girls, has experienced a 36 percent plunge in its lowest-rated bonds in the past 12 months, Bank of America Merrill Lynch index data show. 

Tumbling Values
The price on the biggest bond issuance of Claire's Stores has dropped steadily
Source: Finra Trace, Bloomberg

The crux of the issue is the changing behavior of American consumers. They aren’t going to malls as much. They’re also spending less money on food and clothes as a proportion of their income. They’re buying more stuff online. Yet companies from Macy’s to J.C. Penney to Sears are stuck thinking about how to keep making interest payments instead of focusing on reviving their businesses.

The mountain of debt is substantial.

The Bank of America Merrill Lynch U.S. Retail index has almost doubled in the past seven years to include debt with a face value of $183 billion. The growth came on the heels of the Federal Reserve’s unprecedented stimulus efforts, which suppressed benchmark yields and allowed some companies to survive simply by pushing back their debt maturities.

Piling Up
The face value of retailers' debt has almost doubled in seven years.
Source: Bank of America Merrill Lynch

Some of this debt is becoming a greater liability than others. While behemoth, top-rated retailers such as Wal-Mart and Target aren’t going away so quickly, other borrowers, such as J.C. Penney, Toys "R" Us and Claire’s, face a more compromised outlook.

This is a problem for both the borrower and the lenders. Not only are retailers failing to come up with new innovations to increase income, but they’re spreading the pain to debt investors who have been suffering some significant losses over the past year.

Some $6.4 billion of Macy’s bonds have lost more than $200 million of market value in the past 12 months. The price on $1.13 billion of Claire’s bonds has fallen to 78 cents on the dollar Monday from as high as 105 cents in July 2014.

The experience of the retailers has broader implications for other industries. In the wake of the worst financial crisis since the Depression, stimulative U.S. policies prompted companies to load up on cheap debt. Like teenagers blowing their allowance, many of them spent it on share buybacks and dividends, not investments. Macy’s for example, is buying back billions of dollars in shares, as my colleague Shelly Banjo recently noted.

As the American economy struggles to gain momentum, it is more dependent than ever on companies to innovate and rejuvenate their operations to adapt to changing conditions. As many retailers have demonstrated, however, it’s tough to be nimble when bloated, and shedding the weight is never as easy as packing it on. Count on the drag lingering for some time.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lisa Abramowicz in New York at labramowicz@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net