Markets

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

It’s been a bad couple of months for Neiman Marcus.

The luxury department store reported plummeting sales and a bigger loss than analysts expected. It then scrapped plans for an initial public offering. Meanwhile, it has a higher amount of debt relative to earnings than its competitors, has a low credit rating and relatively little real estate to sell in a pinch.

So it’s not surprising that the company’s bonds have been losing value.

But the already beaten-up Neiman Marcus notes plunged substantially further on Monday without an obvious explanation. While prices on bonds maturing in 2021 had dropped more than 19 percent from Dec. 12 through Friday, they fell an additional 6.7 percent on Monday for the biggest one-day loss in more than a year.

Liquidation Sale
Neiman Marcus bonds have plunged as the retailer struggles against a weak macro backdrop
Source: Finra's Trace, Bloomberg

Perhaps one catalyst was disappointing earnings reports from other retailers, particularly those focused on U.S. shoppers. And the weakness is bleeding into January, with sales falling 4.8 percent in the first two weeks of the year compared with those in the period a year earlier, according to Bloomberg Intelligence's Poonam Goyal, citing First Data figures.

Still, this isn't a new development. Bond investors can't exactly have been taken by surprise by this sea change in consumer behavior, away from shopping at stores and buying goods and toward shopping online and purchasing vacations and experiences.

More than likely, a big investor or two simply decided enough was enough. They wanted to liquidate their holdings and found few buyers. So prices dropped sharply.

While this could be seen as an isolated incident in a broader high-yield bond market that is generally gaining value, it points to some potential danger. There are some big sinkholes out there, waiting to be discovered as soon as a big investors go to sell their holdings.

Retailing is a likely industry for these potholes; indeed, the Bank of America Merrill Lynch U.S. High Yield Super Retail index has fallen more than 1 percent so far this year even as the broader U.S. junk-bond market has gained 0.9 percent.

Diverging Fates
Junk bonds of retailers have fared worse than the broader U.S. high-yield debt market of late
Source: Bank of America Merrill Lynch index data

Meanwhile, even though traders started the year with optimism about U.S. growth, speculative-grade companies are struggling to raise money through the debt markets. United Continental, for example, just cut its bond offering to $300 million from $500 million, the first downsizing of any issuer this year, according to Bloomberg's Gowri Gurumurthy.

U.S. high-yield bond sales so far this year have lagged behind volumes seen in 2013 and 2014, even though investment-grade companies have sold record amounts of debt.

Losing Steam
After weeks of pouring cash into junk bonds, investors are now showing less interest in the debt
Source: Bloomberg

Despite a show of optimism at the end of last year, it's clear debt investors are becoming nervous about slower economic growth. Given that backdrop and historically low yields, junk-debt buyers are showing significant restraint. This suggests that Neiman Marcus isn't the last sinkhole. There will be more pain ahead should any other investors decide to liquidate their less-traded notes.

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