Retailers are entering their most profitable quarter of the year, and many have been forced to tap into revolving lines of credit to cover the costs of inventory and labor. Others are doing it as a preventative measure.
The move is particularly worrisome for LBO-backed retailers, given the dismal projections for holiday sales. Add to that the poor performances of many PE retail plays, including the liquidation of Mervyns and Linens N’ Things. Beyond that, there’s predictions of massive defaults in the first quarter of next year. Not to mention, they’re drawing down loans to finance a reduced inventory. Adding further insult to injury, the holiday shopping season is technically one week shorter this year, since Thanksgiving falls a week later than usual.
At the top of the list is Blackstone and Bain-backed Michaels Stores, which on Wednesday drew down $120 million from its ABL revolver. The $1 billion facility has $515 million of unused debt. According to an SEC filing, the funds will be used to support working capital needs and interest payments on debt related to the company’s 2006 LBO.
Non-LBO backed retailers like Abercrombie and Sotheby’s have done it as a precautionary measure, with the latter investing in short-term treasuries. Offering an explanation, one source said they’re doing it “if for no other reason than you don’t know what you don’t know.”
Publicly-owned retailers should weather the storm, according to a Bank Of America research report covering luxury and soft goods retailers:
Revolvers generally provide ample liquidity cushion. The retailers are all able to access funds through existing credit facilities which are (a) generally more than
ample to fund peak borrowing needs, (b) well-diversified among multiple banks,and (c) mostly not coming up for renegotiation before the 2010-2012 period.
But nevertheless, this revolver talk struck a chord with me because of conversations I had last week with Mo Meghji of Loughlin Meghji + Co., a restructuring advisory firm. He said that companies have been relying on their revolvers more in this cycle than ever before. Once companies run out of rope with their revolving loans-essentially maxing out their credit cards-there will be no more credit left. Let’s hope the current revolvers have enough room to carry some of these retailers through the slow first quarter. The Wall Street Journal demonstrated that many a PE-backed company is drawing down its revolving credit, including Lear Corp, First Data, and Service Master.