As the fourth generation of Nordstrom Inc.'s founding familyspent the summer exploring the idea of taking the retailer privateand scouting for financing, one thing was clear: It wouldn't comecheap.

The family needed roughly $7 billion to fund the deal, andlenders demanded a steep interest rate, according to people withknowledge of the matter. After meeting at least nine differentfirms over the course of four months, the asking price came toabout 13%, said the people, who requested not to be identifiedbecause the discussions were private.

That's roughly twice the average borrowing cost for typicalretailers, and it's a rate that few otherwise-viable businesseswould be able to sustain.

So the Nordstrom family put its buyout plans on ice Mondayand delivered an unmistakable message to the retailindustry. In an era of shuttered storefronts, bankruptcies andsluggish mall traffic, the sector has become toxic forcreditors.

“There has probably never been a worse time for retailers,” saidLeslie Plaskon, a partner in the finance group at law firm PaulHastings who works with banks and investors on retail debt deals.“The world has changed dramatically.”

Representatives for Seattle-based Nordstrom declined tocomment.

The company was an unlikely poster child for retail-lendingwoes. Unlike some of its peers left in the dust of digitaljuggernaut Amazon.com, Nordstrom hasn't seen sales nosedive. Itsweb strategy is seen as stronger than department-store rivals suchas Macy's and J.C. Penney, with online revenue rising 20% in thesecond quarter.

It's also not afraid to take risks. This month, it launched anew concept called Nordstrom Local, where shoppers can meet with apersonal stylist, get manicures, have a glass of wine, and pick upor return an online order.

Standing Out

Nordstrom's niche offering of higher-end apparel—coupled withthe discount Nordstrom Rack brand—helps differentiate the retailerfrom competitors, said Bridget Weishaar, an analyst at MorningstarInvestment Services.

Still, it's part of an industry where more businesses are ratedas distressed by Moody's Investors Service than at any point duringthe last financial crisis. The ratings firm sees the defaultspecter shifting to retail from the oil and gas industry, where acollapse in oil prices wreaked havoc over the past couple ofyears.

Although there were fewer defaults overall in the third quarter,38% were in retail, compared with 17% in the second quarter—andnone in the first three months of the year.

Toys “R” Us filed for bankruptcy last month, and creditors areclosely watching chains such as J. Crew Group, Claire's Stores andNine West Holdings. The fear is that bulging debt loads, loomingmaturities and softening performance could force morerestructurings in the not-too-distant future.

Debt investors have already been burnt by some of the biggestleveraged retail deals in recent years. Neiman Marcus Group's $2.8billion loan is quoted as trading at less than 80 cents on thedollar, while names like PetSmart, Petco Animal Supplies and Belkare all trading in the 80s.

With the critical holiday season just around the corner, debtinvestors are in no mood to lend to retailers for new deals withoutgetting a better picture of their performance. No wonder then thatthe five banks that the Nordstrom family had chosen—whittled downfrom nine in June—were more or less in agreement that they'd needto be well-compensated for the risk of lending to the retailer,lest they end up being stuck with the debt themselves.

Too Slow?

The family took more than two months to team up with privateequity firm Leonard Green & Partners on the deal, said oneperson with knowledge of the matter. That delay hurt thetransaction's chances, the person said. The bankruptcy of Toys “R”Us and declining prices for PetSmart's debt also made banks moreconcerned that investors would sour on Nordstrom, according to theperson.

The retailer plans to revisit the idea of a deal when theholidays are over, and it could well find more success then, saidTony Scherrer, director of research at Smead CapitalManagement.

“They don't need to push it,” he said. “Putting it out anotherfew months isn't any big deal in the grand scheme of what thefamily is trying to accomplish.”

But the clouds looming over retail show no signs of clearingsoon. Bankers and investors expect the lending drought to last into2018 if not beyond.

“We are over-malled and over-retailed,” said Henry Peabody, amoney manager at Eaton Vance Corp. “Highly levered cyclicalretailers that have a questionable role in the ecosystem are notsomething we are interested in right now. A coin flip on whether ornot a retail company survives is just not in our mandate.”

From: Bloomberg News

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