Belk is the newest division retailer chain elevating eyebrows in some credit score circles.
The Charlotte, North Carolina-based retailer might face challenges forward now that it doesn’t have the payment-in-kind possibility anymore, which means it may well’t use securities or fairness in lieu of money to make curiosity funds on its loans as of late final month.
“Belk has used up all its PIK choices on Feb. 23 and it now has to begin making curiosity funds on the debt,” mentioned a New York credit score analyst. Belk had used the PIK choice to delay paying dividends in money, however now it has to supply a better charge of return.
Plus, the 291-store chain’s worth proposition is fading as prospects have a wealth of selections with the rise of on-line retailers.
S&P World Rankings’ current debt downgrade solely provides to Belk’s potential issues.
Analysts there are involved that “weakened shopper demand and thinning liquidity” put the regional division retailer firm in danger, particularly with a few of its debt coming due.
The rankings agency final month downgraded Belk’s debt rankings to “CCC-” from “CCC+,” its $300 million first-lien first-out time period mortgage to “CCC” from “B-,“ and its $815 million first-lien second-out and $110 million second-lien time period loans to “C” from “CCC-.“
“The adverse outlook displays our expectation that Belk will doubtless restructure its credit score amenities given its onerous capital construction and weak efficiency prospects,” S&P mentioned in a rankings report led by lead credit score analyst Lauren E. Slade.
The report mentioned Belk faces “poor working developments and restricted prospects for a sustained restoration,” whereas final yr’s third quarter confirmed “larger markdowns and vital money burn.” Belk is probably going in the identical place as different malls which have reported dismal vacation gross sales marked by heavy discounting in current weeks. Slade identified that higher freight prices can’t totally outweigh adverse shopper spending developments and what seems to be a “delicate recession.”
Belk wants good market circumstances to be able to make good on its funds. That’s why S&P’s credit score specialists are involved that the corporate’s funds might “deteriorate over the subsequent 12 months.”
Given Belk’s “very excessive leverage” at “effectively over 10x,” S&P believes Belk’s money issues will “both persist or speed up within the coming yr.” The retailer’s omnichannel investments and on-line enterprise can’t but plug the outlet left by flagging retailer foot visitors.
The S&P report warns that Belk will doubtless have to determine alternate options for its “unsustainable” capital construction.
A possible restructuring wouldn’t be the primary one for Belk. Its 20-hour pre-pack chapter in early 2021 removed $450 million in debt and pushed debt obligations out to July 2025.
Sycamore Companions acquired to maintain a 50.1 p.c stake in Belk after the personal fairness agency took full management of the retailer again in 2015. Lenders together with KKR and Blackstone Credit score acquired to separate up the remaining. Belk’s 291 shops and 17,000-strong workforce got here out of the restructuring unscathed.
A Belk spokeswoman didn’t reply to a request for remark, whereas a Sycamore spokesman “declined remark.”
The S&P report didn’t point out a lot confidence in Belk’s future, saying the prospect of the retailer creating wholesome, sustainable earnings “appears more and more unlikely.”
Belk, in keeping with the S&P report, has to step up its money curiosity necessities to 10 p.c from 5 p.c, which “will doubtless overlap ongoing challenges in gross sales, profitability and money circulate.”
On the finish of October, Belk’s debt had ballooned to $1.9 billion, S&P discovered. The retailer wants at the least $40 million in liquid belongings to satisfy its obligation on the $300 million first-lien first-out time period mortgage. S&P believes the corporate ought to have “adequate liquidity” to adjust to this obligation, however “unfavorable market circumstances” might spell hassle.
Elements and different credit score providers are involved that Belk hasn’t been upfront about its funds, making it laborious for them to know whether or not or not their distributors ought to proceed working with the corporate.
One credit score checker who requested anonymity mentioned the retailer has diligently rebuilt its vendor base for the reason that chapter. This particular person accepted of Belk hiring MaryAnne Morin as president and chief merchandising officer final October. And underneath Don Hendricks who’s been chief govt officer since September, the retailer has continued internet hosting common customer-centric charity give-back occasions.
However on this credit score specialist’s opinion, the 2021 restructuring gave Belk simply sufficient liquidity to make it by means of chapter, however not sufficient funding to offer some respiratory room when the going will get robust. For this reason this supply has gotten cautious about approving shopper orders.
“Belk was once a pleasant regional division retailer retailer, however I’m not so certain it’s wanted anymore,” this particular person mentioned, pointing to the demise of friends akin to Shopko and Stage Shops in recent times. Stein Mart, the place Morin as soon as served as president, closed almost all of its 281 shops after it went bankrupt however has since reemerged as an online-only firm underneath Retail Ecommerce Ventures, which relaunches failed chains as digital manufacturers.
One vendor reported a constructive expertise with Belk, largely as a result of the retailer has gotten higher about paying on time. “Belk has been straightening up and paying on time final yr,” mentioned George Feldenkreis, chairman of Perry Ellis Worldwide. “We’re pleased with them. We booked a whole lot of enterprise with them going ahead.”
In the meantime, Belk final month reopened its anchor retailer at Greeneville Commons in Tennessee after turning the placement into the chain’s first outlet. It’s anticipated to open a number of extra as a part of a pilot.