Nordstrom symbolic of retail’s lending woes

Company’s financial search highlights how sector has become toxic for creditors

NEW YORK— As the fourth generation of Nordstrom Inc.’s founding family spent the summer exploring the idea of taking the retailer private and scouting for financing, one thing was clear: It wouldn’t come cheap.

The family needed roughly $7 billion (U.S.) to fund the deal, and lenders demanded a steep interest rate, according to people with knowledge of the matter. After meeting at least nine firms over four months, the asking price came to about 13 per cent, said the people, who requested not to be identified because the discussions were private.

That’s roughly twice the average borrowing cost for typical retailers, and a rate that few otherwise-viable businesses would be able to sustain.

So the Nordstrom family put its buyout plans on ice Mondayand delivered an unmistakable message to the retail industry. In an era of shuttered storefronts, bankruptcies and sluggish mall traffic, the sector has become toxic for creditors.

“There has probably never been a worse time for retailers,” said Leslie Plaskon, a partner in the finance group at law firm Paul Hastings.

Representatives for Seattle-based Nordstrom declined to comment.

The company was an unlikely poster child for retail-lending woes. Unlike some of its peers left in the dust of digital juggernaut Amazon.com Inc., Nordstrom hasn’t seen sales nosedive. Its web strategy is seen as stronger than department-store rivals such as Macy’s Inc. and J.C. Penney Co., with online revenue rising 20 per cent in the second quarter.

Nordstrom’s offering of higher-end apparel — coupled with discount brand Nordstrom Rack — differentiates the retailer from competitors, said Bridget Weishaar, an analyst at Morningstar Investment Services.

Still, it’s part of an industry where more businesses are rated as distressed by Moody’s Investors Service than at any point during the last financial crisis.

Although there were fewer defaults overall in the third quarter, 38 per cent were in retail, compared with 17 per cent in the second quarter — and none in the first three months of the year.

Toys “R” Us Inc. filed for bankruptcy last month, and creditors are closely watching chains such as J. Crew Group Inc., Claire’s Stores Inc. and Nine West Holdings Inc. The fear is that bulging debt loads, looming maturities and softening performance could force more restructurings in the not-too-distant future.

Debt investors have already been burned by some of the biggest leveraged retail deals in recent years. Neiman Marcus Group Inc.’s $2.8billion loan is quoted as trading at less than 80 cents on the dollar, while names like PetSmart Inc., Petco Animal Supplies Inc. and Belk Inc. are all trading in the 80s.

With the critical holiday season just around the corner, they’re in no mood to lend to retailers for new deals without getting a better picture of their performance. No wonder then that the five banks that the Nordstrom family had chosen — whittled down from nine in June — were more or less in agreement that they’d need to be well compensated for the risk of lending to the retailer, lest they end up being stuck with the debt themselves.

The family took more than two months to team up with private equity firm Leonard Green & Partners on the deal, said one person with knowledge of the matter. That delay hurt the transaction’s chances, the person said.

The retailer plans to revisit the idea of a deal after the holidays, and it could find more success then, said Tony Scherrer, director of research at Smead Capital Mana7gement.

But the clouds looming over retail show no signs of clearing soon. Bankers and investors expect the lending drought to last into 2018, if not beyond.