U.S. Retail/Restaurants Sector: Historical Performance And Current Risks

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1 U.S. Retail/Restaurants Sector: Historical Performance And Current Risks S&P Global Fixed Income Research Diane Vazza Managing Director Nick Kraemer Senior Director June 2017

2 Historical Sector Attributes And Performance

3 Rated Population Shows Slow Migration Through Growing Speculative-Grade Majority Early arrival to majority speculative-grade (December 1986) Returned to investment-grade majority from late 1990-Aug

4 Median Rating Is Now Well Into Speculative-Grade 73% of Retail/restaurants sector is now speculative-grade. Sector has been at this level and has seen little change since late This coincides with migration to median rating in B category 4

5 Retail/restaurants Typically Have Higher Non-Recessionary Default Rates Than Overall Speculative-Grade Segment 5

6 Sector Has Been Largely Stable Recently From A Ratings Perspective Retail/restaurants: From/To AAA AA A BBB BB B CCC/C D NR AAA AA A BBB BB B CCC/C Retail/restaurants: 12 Months Ending April 30, 2017 From/To AAA AA A BBB BB B CCC/C D NR AAA AA A BBB BB B CCC/C U.S. Overall: 12 Months Ending April 30, 2017 From/To AAA AA A BBB BB B CCC/C D NR AAA AA A BBB BB B CCC/C One recent rising star: Best Buy Co. Inc. One recent fallen angel: Brinker International Inc. In 2017 through June 14: 17 downgrades, 15 of which by one-notch. Source: S&P Global Fixed Income Research; S&P Global Market Intelligence's CreditPro 6

7 Current Risk Profile And Expectations

Upcoming Maturity Wall Might Pose A Future Risk Near-term prospects for refinancing debt appears favorable: low debt levels and low borrowing costs.

8 Upcoming Maturity Wall Might Pose A Future Risk Near-term prospects for refinancing debt appears favorable: low debt levels and low borrowing costs. Retail/restaurants sector s upcoming maturity profile in future years is more heavily represented by speculative-grade companies compared to overall U.S. rated corporates. 8

9 As It Approaches Recent Issuance Trends Upcoming speculative-grade maturities exceed recent years issuance trends. Rates expected to continue to be low, but rise nonetheless. How much lower, for how much longer? 9

10 How Is The Market Pricing Retailers Bonds? Overall, Very Favorably Retail/restaurants option-adjusted spread (over Treasuries) nearing record-low levels. Finished May at 151 bps; all-time low of 122 bps on Mar. 8,

11 But Industry Spread Now Heavily Influenced By Investment-Grade Component Retail/restaurants sector spread now more in line with its investment-grade segment. Investment-grade segment has growth in (issue) size by 71% since 2010, while speculative-grade segment has declined by 22%. Source: S&P Global Fixed Income Research 11

12 And Investors Are Spotting The Weakest Companies Retail and restaurants is now the sector with the highest distress ratio (21%), having surpassed the oil and gas sector in January. Sears accounts for roughly a third of the distressed bonds within retail/restaurants. The distress ratio is the share of speculative-grade issues with option-adjusted composite spreads of more than 1,000 basis points (bps) relative to U.S. Treasuries. Data: May 15, CP&ES -- Chemicals, packaging, and environmental services; Home/RE -- Homebuilders/real estate companies; Metals Metals, mining, and steel; Forest -- Forest products and building materials. Source: S&P Global Fixed Income Research 12

13 Bond Returns Starting To Show Some Cracks 2.9% loss in 2016Q4 is largest since 2008Q4 2017Q1 gain is lowest since 2006Q1 Source: S&P Global Fixed Income Research 13

14 What Are Our Analysts Saying? Speculative-grade retail/restaurants negative bias now up to 33%, compared to 15% two years ago. Overall speculative-grade negative bias is now 20% and declining. Oil and gas sector still has the highest speculative-grade negative bias, at roughly 50%. Source: S&P Global Fixed Income Research 14

Default Rate Expected To Fall To 3.3% By 2018Q1 S&P Global Fixed Income Research forecasts the U.S. trailing-12-month speculative-grade default rate will fall to 3.3% by March 2018, down from 4.

15 Default Rate Expected To Fall To 3.3% By 2018Q1 S&P Global Fixed Income Research forecasts the U.S. trailing-12-month speculative-grade default rate will fall to 3.3% by March 2018, down from 4.1% in March 2017 (with 72 defaults). Oil and gas sector still the main contributor to defaults. Potential stressors to watch include structural shifts in retail, declines in price of oil, higher interest rates, current credit profile of U.S. issuers, and tax reform unfavorable to imports and debt issuance. Data as of May 31, Shaded areas are periods of recession as defined by the National Bureau of Economic Research. Source: S&P Global Fixed Income Research 15

16 2017 Defaults And Current Distressed List, Through May 2017 U.S. Defaults: Retail/restaurants Parent company Default Date Prior Rating Reason/Type Limited Stores Inc. 1/17/2017 NR Chapter 11 BCBG Max Azria Group Inc. 2/28/2017 NR Chapter 11 hhgregg Inc. 3/6/2017 NR Chapter 11 Payless Inc. 4/5/2017 CCC Chapter 11 Rue21 Inc. 5/4/2017 CC Missed interest payment Marsh Supermarkets Inc. 5/11/2017 NR Chapter 11 Distressed Issuers: As of May 15, 2017 Issuer Distressed Issue Count Rating Outlook/CreditWatch 99 Cents Only Stores 1 CCC+ Negative Beverages & More Inc., 1 B- Stable BI-LO Finance Corp. 1 *CCC+ Negative BI-LO Holding Finance Inc. 1 *CCC+ Negative Guitar Center Inc. 2 *CCC+ Negative Mariposa Merger Sub LLC 2 *CCC+ Negative Sears Holdings Corp. 1 CCC+ Negative Sears Roebuck Acceptance Corp. 6 CCC+ Negative The Bon-Ton Department Stores Inc., 1 *CCC+ Negative The Fresh Market 1 B Negative Tops Holding II Corp. 1 CCC+ Negative Toys "R" Us Delaware Inc. 1 *B- Stable Toys "R" Us Inc. 1 B- Stable TRU Taj LLC 1 *B- Stable Source: S&P Global Fixed Income Research 16

U.S. Consumer Products And Retail/Restaurants Sector: Historical Performance And Current Risks

U.S. Consumer Products And Retail/Restaurants Sector: Historical Performance And Current Risks S&P Global Fixed Income Research Diane Vazza Managing Director +1 212 438 2760 diane.vazza@spglobal.com Nick