Dive Brief:
- S&P Global on Friday downgraded the corporate parent of Academy Sports + Outdoors, giving it a credit rating that indicated selective default after open-market debt transactions, according to an emailed press release. The company did not reply to a request for comment.
- Analysts with S&P noted in a press release that the company, New Academy Holding Co., bought back $54.4 million in principle of its own secured loan at 30% below its face, or par, value. The move followed the disclosure of $89 million in repurchases during the quarter. All told, New Academy bought back 10% of the loan at prices below par, S&P said.
- S&P described the transactions as "de facto partial restructuring" and tantamount to default because the buybacks fall below the original terms and the market transactions were "not completely anonymous." Analysts also noted Academy's weak credit profile and said they expected to upgrade the company's debt from SD to CCC soon "to reflect the risk of a conventional default." Before the downgrade, S&P rated the company at CCC+.
Dive Insight:
Academy's efforts to buy back some of its debt represents one more tool that retailers struggling with balance sheet ills have to stay out of bankruptcy court. More common of late is the distressed exchange negotiated beforehand with lenders.
Deep discounter 99 Cents Only was the most recent retailer to take that path, cutting its second deal with lenders in less than two years, this time trading out nearly $300 million in notes for equity in the company. J. Crew, Neiman Marcus and Charlotte Russe have cut similar deals.
Debt swaps and other financial maneuvers can buy time for a retailer. But sometimes they just kick the can. Toys R Us, for example, restructured its debt numerous times before ultimately ending up in Chapter 11, where it liquidated.
Charlotte Russe, to take another example, still ended up in Chapter 11 after exchanging out debt. It, too, liquidated its operations in bankruptcy. (After buying Charlotte Russe's intellectual property out of bankruptcy, a fashion house recently opened new stores under the brand.)
Meanwhile, J. Crew, which inked a legally contentious debt swap in 2017, reportedly went back to creditors to discuss another debt deal this spring. And it remains unclear whether Neiman's deal can buy it enough time to ultimately make headway on its debt load and reduce its interest obligations.
What all of these retailers have in common, including Academy Sports + Outdoors, are private equity buyouts, which are typically funded mostly with debt. Private equity-owned retailers make up 75% of those with distressed ratings from Moody's, according to Retail Dive analysis. And private equity-owned retailers account for 80% of the major Chapter 11s this year tracked by Retail Dive.
About a year ago, Academy Sports + Outdoors brought in the former CEO of Foot Locker as the retailer tried to manage a turbulent sports retail market dominated by Dick's and Bass Pro Shops. At the time, Academy Sports + Outdoors controlled 11% of the market to Dick's 19%.
The sector has gone through several major bankruptcies, including Sports Authority, Sport Chalet, Eastern Outfitters and Gander Mountain. It's also seen consolidation through mergers, such as the Bass Pro acquisition of rival Cabela's for $5 billion, and JD Sports Fashion's acquisition of Finish Line.
