Nordstrom’s Brush With Junk Proved a Turning Point
(Bloomberg) -- Nordstrom Inc. was so desperate for cash when the pandemic took hold last year that it mortgaged prized assets and took on high-cost debt once reserved for some of the riskiest companies.
Now, thanks to the red-hot corporate bond market and borrowing costs that remain near some of the cheapest ever, the luxury department store chain is beginning to dig out of a hole that pushed one of its credit ratings into junk and threatened to snowball into a cash crisis. Analysts say Nordstrom’s debt sale this week is an important step on its long road back to full blue-chip status in the debt markets.
The retailer sold $675 million of unsecured bonds Wednesday to finish repaying debt it took on at the panicked height of the pandemic last year. The buyback frees up prized real estate including its Seattle flagship that served as collateral. It buys the company more time to repay its debt, and helps improve its challenged liquidity position -- all steps that will help the company boost its credit ratings if operations continue to rebound this year.
“Switching the debt from secured to unsecured frees up all that collateral, which they can potentially use to raise money again in the future,” said Dennis Cantalupo, who runs Pulse Ratings, an independent credit-rating and consulting firm.
Refinancing debt or loosening credit terms had become a particular focus of members of the Nordstrom family after deteriorating ratings last year triggered borrowing restrictions including collateral pledges, according to people with knowledge of the matter.
A cut to junk by just one of the three main ratings firms can trigger a dramatic change of fate for companies, as it ushers in stricter lender controls and rules about events that constitute default. Nordstrom lost its investment-grade rating from S&P Global Ratings in September, and earlier negative outlooks from Moody’s Investors Service and S&P kicked in added balance sheet covenants.
As its ratings fell, Nordstrom was forced to pledge inventory as collateral on its credit line and meet strict financial metrics that limited its flexibility. Additional covenants restricted Nordstrom’s options for financing future payments to vendors and precluded share repurchases and dividend payments until the ratings improved. Those changes contributed to the urgency of debt refinancing talks this year, the people said.
A representative for Nordstrom said the company “remains committed to an investment grade credit rating as part of our long term capital allocation priorities.”
Wednesday’s deal alone wasn’t enough to land Nordstrom an S&P investment-grade rank or a Moody’s outlook adjustment, but S&P revised its outlook on the company to stable from negative, saying it expects the retailer to improve its operating results and retire more obligations this year. It rates the company BB+, one step below investment-grade.
Like many peers, Nordstrom faced a reckoning last year when the pandemic forced temporary lockdowns and shifted consumer fashion tastes away from formalwear and office attire. The retailer responded by amending and drawing down a $800 million credit line, suspending dividends and share buybacks and pledging 12 of its stores and distribution centers to borrow $600 million in the bond market at a hefty 8.75% coupon. It’s since paid back the revolver borrowings.
The new debt, which carries coupons between 2.3% and 4.25%, will take out the higher-priced securities. In all, the deal will save Nordstrom around $29 million annually in interest costs, which over the life of the bonds more than covers the $80 million penalty Nordstrom faces to repay the old notes early. The new borrowings are also unsecured, releasing creditors’ claims on Nordstrom’s real estate.
Some directors last year were uneasy about using real estate, including a flagship Seattle store, as collateral to back the notes, the people said. The Nordstrom family has historically viewed the properties as a crown jewel asset and has been reluctant to surrender liens, they added. A reluctance to pledge real estate was central to the failure of the family’s attempted 2017 take-private deal, the people said.
“This time last year, the sky was falling,” Cantalupo said. “Everyone was scrambling for liquidity. They were paying premiums, having to collateralize and paying higher interest because of the unknown. Had it been three months earlier, this is not the kind of debt that Nordstrom would have been issuing.”
Nordstrom has long held grand aspirations for real estate. It made its boldest move in 2013 when it spent more than $100 million to own the location of its New York store, which opened a half-decade later at the bottom of a Midtown skyscraper. At the time, head of stores Jamie Nordstrom said in an interview that he and his father had been scoping out the island as far back as the mid-1990s to find a place to do business in Manhattan for the next century.
Though it went public 50 years ago, Nordstrom remains a family-dominated company. Three Nordstrom brothers served as co-presidents of the board of directors until a death in 2019, and two continue to serve and hold top executive roles. As the pandemic began last year, Jamie said he was videoconferencing with Chief Executive Officer Erik and President Pete multiple times a day. In normal times, they’d get lunch together on Mondays and talk college football to kick off the work week.
They turn to lessons from previous leaders -- all Nordstroms -- who’ve guided the company through every pandemic, depression and international crisis since John W. Nordstrom co-founded the chain in 1901.
“I think about my grandpa who wrote a book about managing through the Great Depression,” Jamie Nordstrom said at a summit in August. “That was a hard time. They focused on paying their vendors’ bills, paying their landlord. How they managed to get through that – those were some dark years.”
The ongoing pandemic poses a new set of challenges. In January, the retailer reported its fourth consecutive quarterly sales decline, with sales down 22% in the crucial nine-week holiday period to end the year.
Ratings companies say caution is warranted as Nordstrom seeks to bounce back. Fitch Ratings graded the retailer and its new debt the lowest investment-grade rank, with a negative outlook that “reflects uncertainty regarding the timing and magnitude of a recovery.”
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