Default Protection Costs on Nordstrom Debt Tumble After Co. Shelves Take-Private

Credit spreads referencing department store operator Nordstrom (NYSE: JWN) firmed after the company today confirmed recent speculation that the Nordstrom family had suspended its going-private bid for the balance of the year.

Five-year protection costs on Nordstrom debt tumbled by 40 bps to indications of 246 bps, marking a 14% decline. Readings had hovered near 350 bps last month before press reports surfaced that private-equity interest was wavering as financing conditions grow more onerous for brick-and-mortar retailers, particularly following the unnervingly rapid unraveling of Toys R Us.

However, CDS was substantially lower on June 7, at 170 bps, just before the company announced its ambitions to take the storied retailer private. Readings were at 110 bps in early December 2016 before rounds of sector-rattling reports regarding weak holiday shopping results.

Nordstrom 4% notes due March 15, 2027 changed hands this morning at T+175, after trading as wide as T+200 one month ago, trade data show. The 4% 2027 issue dates to pricing on March 6 this year at a tighter T+155 level.

Nordstrom said it would take up its efforts to take the company private “after the conclusion of the holiday season.” Company co-Presidents Blake W. Nordstrom, Peter E. Nordstrom, and Erik B. Nordstrom, President of Stores James F. Nordstrom, Chairman Emeritus Bruce A. Nordstrom, and Anne E. Gittinger made the notification to the Special Committee of the Board of Directors of Nordstrom.

The present BBB+/Baa1/BBB+ ratings on Nordstrom reflect stable outlooks at Moody’s and Fitch, but a negative outlook at S&P Global Ratings since August 2016 due to ongoing sale-store declines across the department-store sector.

S&P Global Ratings in June said the going-private proposition had no immediate effect on ratings, though it assumed any sale would represent a leveraged transaction (in the context of  adjusted debt-to-EBITDA of roughly 2x as of April), and said it would likely place the ratings on CreditWatch with negative implications on the announcement of a specific transaction.

Nordstrom is at present rated higher than its more down-market peers Macy’s (BBB–/Baa3/BBB) and Kohl’s (BBB–/Baa2/BBB), both of which are fallen-angel candidates with negative outlooks on the cusp-level grades at S&P Global Ratings.

Prior to the recent declines, Nordstrom’s go-private strategy had vaulted its debt-protection costs north of the current five-year readings for Macy’s (roughly 300 bps), which reflect both brutal operating progressions and a simmering perception of potential LBO risk. Nordstrom’s CDS also remains more expensive that the 200 bps currently bandied for protection on the debt of Kohl’s, according to Markit. — John Atkins

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