Moody’s warns – bondholders face high defaults

Dusseldorf The risk for international bond creditors caused by Corona is given a house number for the first time: corporate bonds totaling more than $ 174 billion, the rating agency Moody’s announced on Wednesday, are currently among the financial stocks threatened by the epidemic.

This figure corresponds to the outstanding bonds of those 25 percent of the large companies rated speculatively (“non-investment grade”) by Moody’s that have lost a large part of their current income due to official orders: above all the non-food retail trade, followed by the Car industry to the leisure and catering trade.

The energy sector is also indirectly affected, which represents a further 2.4 percent of the group bonds issued worldwide. The oil price shock is throwing business on them these days.

“We will also see a contagion effect in other industries,” warns Moody’s manager Jeanine Arnold. Business service providers, chemical companies and raw material suppliers are exposed to high risks as suppliers.

Even the telecommunications sector, which is hardly affected by the corona crisis at the moment, could be affected at different times. There is usually a correlation between sales development and gross national product, observes Moody’s. With the “unprecedented shock” for the economy of the G20 countries, it is expected there, telecommunications revenues will shrink – but with a delay of one year.

Investors have suspected that the biggest failures from the non-food retail sector are to be feared, not only since the protective shield procedures for the Esprit fashion retailer and the Essen-based department store group Karstadt Kaufhof. A look at the latest reports from the rating agency Standard & Poor’s confirm the concern.

In the past two weeks alone, she has classified industry giants such as Fossil, Levi Strauss, the US department store Neiman Marcus and the British fashion retailer in this sector Matalan down – all now with a non-investment grade. S&P even certified the last two with an “CCC” rating, an acute risk of late payment. Even the hotel chains Hilton and Wyndham, which also got a speculative “BB” thanks to Corona at Easter, are still stable in comparison.

Rapid descent

For bond artists, the situation has escalated at an immense pace. Among the speculative European bonds – that is, from a rating of “Ba1” downwards – there will be a default of 7.8 percent by the end of the year, Moody’s expects. By March 2021, it could even be eight percent. In the twelve months to March 2020, however, the default rate was just 1.7 percent.

Between early March 2020 and April 9, 22 percent of all companies rated by Moody’s as “speculative” received a devaluation. Companies from retail and the automotive industry in particular were often down several levels.

“In addition, the corona crisis will significantly widen the gap between relatively financially strong and financially weak companies,” warns Moody’s manager Arnold. For example, issuers classified as moderately speculative (“Ba”) only had three devaluations between the beginning of March and April 9 that made up more than one meter, while the poorer credit ratings (“B” and below) gave 33.

Speculative issuers tend to have weaker market positions, are more geographically defined and focus on fewer customers and suppliers, Moody’s explains. In some cases, they would have a higher fixed cost share, which limits operational flexibility. This makes it difficult for them to react to the suddenly and unforeseen restrictions.

Investment grade companies, on the other hand, would typically have better access to sources of finance, often to equity. In addition, there would often be levers to limit the outflow of funds – for example through dividend cuts or the provision of investments.

Such conditions currently count not least for government aid programs. In Britain, for example, the government has made the CCFF program explicitly available to investment grade companies. In other countries, including Germany, the banks have to guarantee part of the government loans. Moody’s believe that this limits the prospects for companies that were considered “speculative” even before the corona crisis. The tour operator Tuiwho received a EUR 1.8 billion KfW loan is an exception here.

More: With Daimler, BMW and ford It hit the first: The corona crisis is causing rating agencies to downgrade car companies. It can go further down.

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Corona speeds up the death of inner cities

Dusseldorf Mark Rauschen is concerned. “Around six million visitors come to our fashion and sports house every year,” says the managing partner of L&T in Osnabrück.

But the attraction in the city of Osnabrück is closed because of the corona crisis. “It is currently spooky in the city center,” Rauschen describes the consequences of the state-prescribed shutdown for the city in northern Germany.

It could look similar in many German cities after the end of the corona crisis. Because experts assume that many retailers will not be able to cope with the week-long closure of their shops.

In addition, since many restaurateurs are threatened with the end, there is a risk that the vacancy rate in many city centers will accelerate and that they will become less attractive. The bitter consequence: fewer visitors come to the centers.

“In order to maintain the attractiveness of city centers, a functioning fashion trade is very important,” says Klaus Harnack, partner of the management consultancy Hachmeister + Partner. “This also benefits other sectors that are important for the vitality of cities, such as gastronomy,” emphasizes the consultant.

Bankruptcy wave is expected

But this colorful mix of fashion and other shops and restaurants could change dramatically in the next few months. “At the end of the year at the latest, there will be an unprecedented wave of retail bankruptcies,” says Harnack. He worries that about a third of the companies will not survive the consequences of the corona crisis.

For years, fewer and fewer people have been coming to the cities to shop. In the past five years alone, the number of stores in German retail has declined by around 29,000, according to the Handelsverband Deutschland (HDE).

“Every fifth company in Germany could go bankrupt”

This is due to the growing online business, but also to the fact that the inner cities are becoming more and more the same, because the same chain stores are everywhere esprit about HM to Zara shape the picture – and give up smaller retailers.

In addition, even large corporations such as Galeria Karstadt Kaufhof are at risk. Germany’s largest department store group recently registered a protective shield procedure. The retail giant wants to protect itself from creditors’ claims in the corona crisis.

Difficult times for landlords

This not only affects the big German cities. “The smaller the locations, the more difficult it becomes,” says Eckhard Brockhoff. The entrepreneur from Essen sees himself as the largest regional commercial broker in Germany. Many medium-sized towns had already struggled in recent years. But now the situation is even more explosive.

The broker sees hard times especially for some landlords. Some will lose their tenants because they have to file for bankruptcy. Others are trying to suspend the rent in the coming months with reference to the corona crisis. It may well be that many retail chains wanted to permanently lower their rents afterwards, says Brockhoff.

In the past few years, retailing in city centers had been increasingly replaced by restaurants and takeaways. “Food is the new shopping” is the motto of many neighborhood developers, observes Michael Lidl, partner of the hotel and catering consultancy Treugast.

However, Corona could also partially break off urban catering. The risk of the gastronomic landscape becoming deserted already existed before the crisis. But “such a process is accelerated by the corona crisis,” says Lidl.

Hermann Weiffenbach, the founder of the Enchilada Group from Munich, agrees with this opinion. The entrepreneur and franchisor for around 90 restaurants nationwide fears: “We will experience an insolvency wave in the catering trade. It will hit the small restaurateurs in particular, who generally have no reserves. ”

Fashion brands fear for retailers

International chains could last longer financially. A variety of restaurants, ice cream parlors and cafés are just as important for lively city centers as a wide range of retail outlets.

In order to prevent the store from dying, many companies in the fashion industry have now joined forces. This includes Mark Bezner from the shirt manufacturer Olymp as well as the bosses of the men’s fashion brand Brax and Michael Hirmer, managing partner of the Munich textile house of the same name.

“The overriding goal is to maintain vital inner cities in Germany with an almost unique mix of retail, catering and cultural institutions,” write the authors of a thesis paper, which also includes large associations such as the Federal Association of German Textile Retailers.

Given the expected losses this year and next, loans would not be enough to avert an unprecedented wave of bankruptcies. Retailers and manufacturers would be hit existentially and there would be a devastating domino effect. So it is about the preservation of 440,000 jobs in retail alone with clothing, sports articles, shoes and leather goods.

Austria as a role model

The fashion companies are demanding compensation for the pecuniary damage they suffered as a result of the closure of the shops due to the corona crisis. They refer to the Austrian model.

There, for example, initially granted loans can be converted into grants. In addition, grants can be paid regardless of previously granted loans.

Because according to calculations by Hachmeister + Partner, it can be assumed that the retail sector will only slowly recover after the stores have opened. Depending on the scenario, the drop in sales in May will be up to 50 percent compared to the previous year.

Handelsblatt Morning Briefing - Corona Spezial

A drop of 40 to 50 and 30 to 40 percent is also expected in June and July. Therefore, the dealers could hardly pay rent, personnel and energy costs.

Above all, companies have to prepare for the reopening of the stores. “We are preparing to prepare enough disinfectants, masks and plexiglass panes to protect against spills at the cash registers,” explains Mark Rauschen, head of L&T in Osnabrück, about the huge changes that the corona epidemic will bring to the retail trade.

“We will not experience the ease of shopping in the past,” feared Rauschen. It will take some time before as many visitors as before the crisis will make a pilgrimage to the house with the surf pool.

More: More and more chain stores no longer pay rent.

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The fashion industry is breaking the middle

Times are difficult for the entire German economy. And it is also understandable that everyone who can apply for government aid to survive the corona crisis. This applies in particular to the German fashion industry. Companies of Gerry weber via Bogner to Boss suffer particularly from the fact that all shops in Europe are closed.

The fashion industry is one of the big losers in the pandemic. Because if you no longer drive to the office, visit theaters, restaurants or go on vacation, you don’t feel like buying a new outfit – not even in the online shop. In the home office, part of the full wardrobe is enough, especially if you switch off the video function during the conference call.

The state-prescribed shutdown is bitter for the fashion companies. There is currently little hope that anything will change so quickly. Because the willingness to buy should hardly increase in the coming months. It can be expected that when life returns to normal, people will spend money on a lot, but not on new clothes. Short-time work or unemployment of hundreds of thousands put a considerable strain on the household budget.

However, the corona crisis is likely to be particularly difficult for some fashion companies: These are the companies from the middle of the fashion market. It meets well-known names like Gerry Weber, esprit and Tom Tailor or S.Oliver. All companies that offer mid-price t-shirts, dresses and trousers. In the past few years, they have failed to develop strategies to defend themselves against the brutal change in the fashion market.

Because they are attacked from two sides: from below by discounters like Primark, Kik and the grocery discounters Aldi and Lidl – and from above by premium and luxury brands like Marc O’Polo, Tommy Hilfiger and Gucci. A dangerous grip.

The trend to expensive or cheap in the fashion industry has been going on for some time. The discount and premium and luxury segments have been growing fastest for years. This trend is likely to be exacerbated by the corona pandemic. Either people spend as little money on clothing as possible, or they are willing to have their skirt and trousers cost significantly more. But they also demand more value for it: higher quality, perfect service, a better brand image.

Large retailers also under pressure

All providers who move between the two extremes have a hard time and lose market share. Many fashion companies are therefore trying to escape and try to upgrade their image and collection. However, this is expensive and takes a lot of time, as the example of Esprit shows. The company has been undergoing permanent renovation for years and has tried several times to improve its image with large advertising campaigns – with little success. A few days ago, Esprit had to register for self-administration.

For brands from the middle of the market, the situation is becoming more acute because important sales channels are also struggling with problems: what happens when the large operators of department stores such as Karstadt Kaufhof or Peek & Cloppenburg close branches after the corona crisis or downsize?

Because the big retailers themselves are under massive pressure to change their business concept in order to survive. It is no longer enough to set up a coffee bar, a mobile phone charging station or a cozy corner for the little ones to lure online customers back to their shops.

The buying experience must be in the foreground

They only come when retailers score with personal service, a selected collection that is not available on every corner and an intelligent combination of online and offline shopping. Above all, they must succeed in making their business a real meeting place, where it is not just a matter of selling jackets, handbags or sneakers.

The buying experience must be in the foreground, as Breuninger or the Kadewe Group demonstrate. The motto also applies in retail: he has to choose between expensive or cheap.
The fashion industry must not go any further when it comes to sustainability. It is not enough to compete with each other with new seals for green fashion. Instead of throwing more and more organic cotton onto the market, for example, it makes more sense to improve the quality of the collections – according to the motto: less is more.

That would also be an opportunity to reduce the discount madness in the industry to a healthy level. This would even help some fashion companies from the middle of the market to survive in the post-Corona era with new concepts.

More: After Adidas and Deichmann, other companies announce that they will pay less or no rent.

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