Belk Inc. Downgraded To 'CCC' From 'B-' On Increased Refinancing Risk; Outlook Negative

  • U.S.-based regional department store operator Belk Inc.'s revenues and margins deteriorated meaningfully in 2018.
  • In our view, Belk's weak operating results heighten refinancing risk and we believe a debt exchange that we would view as distressed could occur over the next 12 months.
  • On June 10, 2019, S&P Global Ratings lowered its issuer credit rating on Belk to 'CCC' from 'B-'.
  • At the same time, we are lowering our issue-level rating on the company's senior secured term loan to 'CCC' from 'B-'. The '3' recovery rating is unchanged.
  • The negative outlook reflects the possibility that we could lower the rating if we believe the likelihood of a default or restructuring within six months has increased.
NEW YORK (S&P Global Ratings) June 10, 2019--S&P Global Ratings today took the rating actions listed above. The downgrade reflects Belk's weakened competitive standing on soft operating results and deteriorated profits. It also reflects our view that Belk's capital structure is unsustainable as maturities get closer, including the company's asset-based lending (ABL) revolver that matures in December 2020 and first lien term debt that matures in December 2022. Given the weak business trends and upcoming maturities, we believe a proactive restructuring is increasingly likely. Additionally, we believe distressed trading on the company's term loan creates an economic incentive for the company to purchase the debt below par, which we may consider tantamount to a default in the future.
The negative outlook reflects our view that the company could pursue a debt exchange that we would view as distressed in the next 12 months. The negative outlook also considers our expectation that financial performance will remain under pressure amid difficult operating conditions in the department store space.
We could lower the rating if we view the prospect of a default or restructuring as likely over the upcoming six months. This could occur if the company's operating performance deteriorates, resulting in persistent negative FOCF, while the maturity of its ABL revolver continues to loom, challenging the company's near-term liquidity position.
We could take a positive rating action if the company demonstrates improving liquidity and substantial earnings growth such that we believe a refinancing of all debt instruments at par is likely.
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