Dive Brief:

• Moody's analysts led by Charles O'Shea warned of a "crisis of confidence" that could spread through the retail world following the sudden bankruptcy of Toys R Us at the outset of this year's holiday selling season, according to a report emailed to Retail Dive Wednesday.
• In the case of Toys R Us, the retailer's vendors lost confidence in the health of the company ahead of the holidays as it sought advice on restructuring $5 billion in debt. O'Shea and his team notes that other "retailers are fairly well stocked for at least the front half of the holiday season." But, he adds, "What is unknown at this point and potentially very difficult to determine, is the status of the 'reloading' relationship that may be necessary for the later stages of the holiday season. In our view, this is where the risk lies."
• All this compounds problems for retailers that already have low credit ratings, which are likely to have high debt levels as they could have trouble gaining additional financing to stock their shelves, O'Shea and his team note: "Lower-rated issuers are especially vulnerable to a potential vendor squeeze going into the holiday season."

Dive Insight:

The Toys R Us bankruptcy has investors spooked. And if it doesn't already have plenty of retailers spooked as well, it should — that's one message from O'Shea and the Moody's team. In their view, "life could get a lot tougher, a lot quicker" for many of the retailers they follow.

Retailers already laboring under high debt levels are vulnerable to supplier runs and the liquidity crunches that come with them. Moreover, the wider retail industry's ailments — declining traffic and sales, spending shifts, e-commerce penetration and so on — make it harder yet to wrangle new loans, which in turn make it harder to run a business, if not impossible without help from a bankruptcy court.

All of this played out with Toys R Us. "One of the most chilling aspects of the Toys bankruptcy was the speed at which it occurred," O'Shea said. "The trigger was a sudden crisis of confidence, with certain vendors effectively cutting off Toys' future supply of inventory via tightened repayment terms."

"This is a particularly scary development that should have all retailers, particularly those at the lower end of the rating scale, beginning with B2, reassessing their working capital profiles," O'Shea adds. "That's what vendors, trade credit, and lenders to the vendor universe appear to be doing."

Analysts with Fitch, too, have pointed to questions and concerns among retail lenders after the Toys R Us filing. That ratings firm recently released expanded "loans of concern" lists, giving investors a window into analysts broader thinking about industries and individual firms. The recent watch lists included several retailers on both primary and secondary watch lists, as well as a short list specifically for those that show few signs of immediate financial collapse, but that analysts are still monitoring closely.

It all points to a financial and operating environment for retailers that is still full of risks after a year of recession-level bankruptcies. Many of those Chapter 11 filings — such as Payless, Gymboree, rue21 and True Religion — resulted in straightforward downsizings of debt and stores that could better position those companies for the future, if they can stabilize sales. But liquidation is far more common, historically.

This year's fourth quarter will likely shed light on what 2018 might look like, and how much more bloodletting might be in store for retail.