Higher debt and weaker consumer to hurt retailers

By Natalie Harrison - Analysis

LONDON (Reuters) - Retailers are in danger of becoming one of the leading victims of the credit crisis, with the cost of insuring their debt against default on the rise due to their exposure to heavily indebted Britons.

When demand is strong the sector is prized for being highly cash generative and able to pay down debt quickly, but in leaner times cash reserves can quickly erode and retailers can become more vulnerable to defaulting on their debt.

A warning from retailer Marks and Spencer's (MKS.L) Chairman Stuart Rose last week that the consumer downturn was likely to be deeper and last longer than previously expected sent its credit default swaps (CDS) sharply wider and hurt sector rivals such as Next (NXT.L) and Kingfisher (KGF.L) too.

M&S's shock profit warning showed just how deeply consumers are already re-evaluating what they buy and where they shop, with mortgage costs rising along with fuel and food bills.

Five-year CDS on M&S, the cost of insuring its debt, is currently at about 265 basis points. That is more than double the five-year CDS on lower credit-rated Dutch retailer Ahold (AHLN.AS), Markit data shows.

Andrea Cicione, a credit strategist at BNP Paribas, said the retail sector could come to epitomise this downturn, just as the highly leveraged telecoms sector suffered most from a rise in defaults in 2000 and 2001.

"The reason is different though. Retailers are not so highly leveraged, it's more that this is going to be a consumer-led slowdown," said Cicione. The United States and the UK are most vulnerable because the growth in consumption has been fuelled by debt, he said.

"That consumption will slow, if not contract."