Deals

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

Nordstrom Inc. will just have to wait. 

The department-store chain said Monday that its founding family had hit the pause button on efforts to take the company private, in part because of the "difficulty of obtaining debt financing in the current retail environment prior to the conclusion of the approaching holiday season." 

Wait and See
Banks contemplating financing a Nordstrom buyout are likely concerned that future weak sales could dent the company's earnings, forcing them to resell the retailer's debt at a discount
Source: Bloomberg

It's no wonder that lenders are unwilling to stump up the billions of dollars of debt financing needed for a buyout just now -- after all , this is retail we're talking about. But also, banks have been burned in the past.

Typically, when lenders arrange buyout financing, they offload the risk by reselling most of the debt in the form of leveraged loans and junk bonds. But they can get stuck holding it for longer than anticipated or be forced to sell it at a discount if there's tepid investor interest or a borrower's performance goes south. That can lead to losses.

Recent examples of "hung" acquisition financing include Scientific Games Corp.'s 2014 purchase of Bally Technologies Inc. and Carlyle Group LP's purchase the following year of Veritas. The debt for these deals ended up sitting on the books of banks including JPMorgan Chase & Co., Deutsche Bank AG, Bank of America Corp. and Morgan Stanley at year-end, leaving an ugly blemish. 

Left at the Checkout
Nordstrom's founding family hasn't been able to secure financing for a buyout of the department store regardless of their sizable equity position and its low valuation
Source: Bloomberg

The Nordstrom family intends to pick up where it left off after the holidays, which should give investors some hope that a deal is revived. By then, banks will likely have a renewed level of risk tolerance, and not just because they'll have a longer runway to offload debt to investors. Lenders also will be better able to price debt with the knowledge of how the company fared during its all-important fourth quarter, when we'll get a better understanding of how the company's Nordstrom Local experiment is panning out. 

Department-Store Doldrums
The performance of privately held retailers is reflected in its debt. If Nordstrom's performance tanks after a buyout, banks would be forced to sell debt at a discount to par.
Source: Bloomberg

It's comforting to see banks being prudent and preserving their own balance sheets ahead of year-end, even though it's not clear if it's motivated by bankers seeking to safeguard (or maximize) their own bonuses rather than mitigate the banks' losses. Likely, it's both. Either way, by refusing to commit to this deal just yet, banks will avoid the anxiety that has loomed over holidays in recent years.

Leaving this transaction at the check-out for now shows Wall Street banks are capable of curbing their own risky lending -- even without the influence of regulators

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

To contact the author of this story:
Gillian Tan in New York at gtan129@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net