Coronavirus Fallout Poses Challenges for Most Vulnerable U.S. Retailers

Coronavirus Fallout Poses Challenges for Most Vulnerable U.S. Retailers

ABI Bankruptcy Brief

March 5, 2020

ABI Bankruptcy Brief

Coronavirus Fallout Poses Challenges for Most Vulnerable U.S. Retailers

Lenders and analysts say that the weakest U.S. retailers will face the biggest risks from the coronavirus epidemic if Chinese factories overseas remain understaffed and customers at home stay away from brick-and-mortar stores, the Wall Street Journal reported. Luxury chain Neiman Marcus Group Ltd., fabric and craft supplies chain Jo-Ann Stores Inc., and apparel seller J.Crew Group Inc. are among the junk-rated retailers that are exposed to the potential fallout from the coronavirus outbreak, they said. China’s efforts to contain the epidemic have weighed on its manufacturing sector as small private factories and larger state-owned facilities endure extended shutdowns. U.S. retailers have varied exposure to the manufacturing contraction, depending on how much of their inventory comes from China or other affected regions. Economists say that it is too soon to know how much the virus might affect consumer spending but that it could upend supply chains and cause some product shortages, especially as retailers run out of Chinese-made goods already stocked in warehouses. The biggest risk facing weaker retailers is a possible pullback in demand as the virus spreads in the U.S., spooking consumers, said Moody’s Investors Service managing director Mickey Chadha. But if production in China doesn’t return to normal levels by late April, U.S. retailers also could face challenges stocking up in time for the back-to-school and holiday shopping seasons, said Thomas O’Connor, a senior director and research analyst for supply chains at Gartner Inc. (Subscription required.)



IATA: Global Airlines Could Suffer Up to $113 Billion in Lost Revenue Due to Coronavirus Crisis

The International Air Transport Association (IATA) said in an updated analysis that passenger airline business could suffer losses between $63 billion and $113 billion because of the novel coronavirus, depending on the severity and length of the outbreak, the Washington Post reported. Alexandre de Juniac, IATA’s director general and CEO, said that the outbreak amounts to a “crisis” for the industry. The IATA had published on Feb. 20 an estimate that lost revenue would hit $29.3 billion, but that was based on a scenario confining the fallout to markets associated with China. “Since that time, the virus has spread to over 80 countries and forward bookings have been severely impacted on routes beyond China,” the industry body said. Airlines around the world have begun canceling flights due to lower demand and complicated travel restrictions amid the coronavirus outbreak, with airlines outside Asia suffering amid a global pullback. IATA said the range of its newest estimate was based on different scenarios, with the lower estimate reflecting the costs if the coronavirus is contained in current markets with over 100 cases as of March 2, and the higher end if the outbreak spreads further. The analysis noted that financial markets were already pricing in a shock to industry revenue greater than its worst prediction, with airline share prices falling nearly 25 percent since the outbreak began. Although falling oil prices may help airlines offset some of the cost, IATA suggested the industry would need government help.

In Restaurant Glut, Strategic Buyers Keep Bankrupt Chains Afloat

Decreased foot traffic, competitive marketing strategies and rising debt loads have choked the restaurant industry and led to a flurry of bankruptcy filings — but strategic buyers haven’t shied away from chains in distressed situations, Bloomberg News reported. Strategic buyers, usually restaurant groups that already own other brands, often get a good deal when purchasing a failing chain because they have existing operations like restaurant management to run additional locations. Private-equity firms, on the other hand, often have to carry that overhead themselves, meaning the risk is higher and the reasoning behind the purchase has to be stronger, said David Bagley, managing director at Carl Marks Advisors. At one time, private-equity firms including NRD Capital Management LLC, Sun Capital Partners Inc. and TriArtisan Capital Advisors LLC put a lot of capital into the restaurant space, buying brands including Ruby Tuesday, Boston Market and TGI Friday’s, respectively. The level of private-equity investment in restaurants, however, fell to $4.75 billion in 2019 compared to a decade high of $18.29 billion in 2017, according to data from Pitchbook. Private equity used to make money on restaurants by using high levels of capital to increase the number of locations, expanding brand presence and driving additional revenue, Bagley said. That old strategy doesn’t make sense anymore because there’s so much additional restaurant square footage while foot traffic is shrinking, he said. One of the major struggles for restaurant brands recently has been driving customer traffic in an environment where a few chains — those with strong investment in food innovation and marketing — are top-of-mind for the restaurant-goers.

Fifth Third Latest Bank in CFPB Crosshairs over Phony Accounts

The Consumer Financial Protection Bureau is continuing its crackdown on banks opening unauthorized accounts after Wells Fargo's phony-accounts scandal prompted the agency to investigate aggressive sales tactics at other institutions, American Banker reported. The latest institution in the bureau's crosshairs is Fifth Third Bancorp, which disclosed in a securities filing this week that the CFPB intends to file an enforcement action related to “alleged unauthorized account openings” at the Cincinnati-based bank. Last year, the CFPB began investigating whether Bank of America also violated federal law by opening credit card accounts without customer authorization. The $169 billion-asset bank says it plans to fight the action brought by the agency. Further details about the CFPB's allegations are unclear. Fifth Third spokeswoman Laura Trujillo said the bank will “fully cooperate with any regulatory and government inquiries,” but she would not say what types of accounts are under investigation by the CFPB.

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