7 companies at risk of cash shortages

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In an environment of rising interest rates and tightening credit markets, companies with weaker balance sheets are being squeezed by higher borrowing costs.

Royal Caribbean Group

(symbol: RCL) is a good example. The cruise line had $5.5 billion in short-term debt at the end of June, but $2.1 billion in cash. Royal Caribbean just issued $1.15 billion worth of convertible notes to hedge some of its current debt, pushing their maturity from 2023 to 2025. But it comes with a higher interest rate – 6% at instead of the restated debt rates of 4.25% and 2.875%.

However, the company’s operating cash flow turned positive last quarter and CEO Jason Liberty said he plans to return the company’s balance sheet to pre-pandemic levels. The company could not be reached after multiple requests for comment.

To fight inflation, the Federal Reserve has raised its benchmark interest rates by 2.25 percentage points since March. This could cause problems for high-risk issuers who need to refinance their debt or borrow more.

“Not only do these issuers generally have fewer funding options, but growing risk aversion in a context of market volatility and rapidly changing funding conditions could exacerbate their rollover risk and funding costs,” wrote Evan Gunter, analyst at S&P Global Ratings, in a recent report.

Already, bond issuance for junk-rated issuers has fallen 75% in the first half of 2022. The amount of distressed debt – junk-rated bonds trading at yields 10 percentage points higher than bonds in the Treasury – jumped to $116 billion in July, from just $26 billion two months ago, according to S&P. This suggests that the credit market is increasingly concerned about debt repayment.

If the economy deteriorates, companies could see their profits decline, further straining their cash flow. Companies that find it difficult to obtain loans could be forced to sell shares, which would dilute shareholders. In the worst case, a company could become insolvent.

To find businesses at risk of cash shortages, Barrons selected for those whose cash balance has more than halved from a year ago. Of these, we looked for companies with short-term obligations, including fixed debt and rent, greater than their combined cash balance and one-year earnings.

Company / Symbol Change since the beginning of the year Cash balance (millions) Cash balance one year ago (mil) Short-term obligations (millions) Last 12 months Ebitda (mil) Data at
Royal Caribbean Group / RCL -45.7% $2,102 $4,307 $5,538 -$1,884 06/30/2022
Bed bath and beyond / BBBY -27.1 108 1,132 335 -121 05/28/2022
Party Town / PRTY -75.0 39 85 350 95 06/30/2022
Ritual aid / RAD -28.0 56 119 579 411 05/28/2022
Wolverine Worldwide / WWW -21.2 149 346 533 290 02/07/2022
Calères / CAL 31.2 34 98 424 310 04/30/2022
Express / EXPR -31.8 37 84 200 96 04/30/2022

Note: variation since the beginning of the year until August 11.

Sources: FactSet; Bloomberg

After a closer look, we identified seven companies to watch: Royal Caribbean, seller of party supplies

party town

(PRTY), home goods retailer

Bed bath and beyond

(BBBY), pharmacy chain

Ritual Aid

(RAD), fashion retailer

Express

(EXPR) and shoe companies

Wolverine around the world

(WWW) and

wedges

(CAL).

The retail sector is a sore spot. Retailers rely heavily on consumer demand and often don’t have enough pricing power to pass on higher costs to consumers, says Neha Khoda, head of lending strategy at Bank of America Merrill Lynch.

Bed Bath & Beyond is facing declining sales and posting losses as consumers spend less amid runaway inflation. It doesn’t help that the company has spent more than $1 billion on stock buybacks since 2020. Bed Bath had $108 million in cash in May, up from $1.1 billion a year ago. .

While most of Bed Bath’s debt doesn’t come due until 2024, it has to pay $335 million in rent next year. Bank of America analyst Jason Haas warned the retailer could face a cash crunch if sellers ask it to pay for merchandise on shorter terms.

Bed Bath still has $1 billion available in its revolving credit facility, a company representative said Barrons. “We have already taken action on many fronts, including a reduction of at least $100 million in [capital expenditure] against the company’s original plan,” he noted in an email.

Party City has $39 million in cash as of June, with $350 million in debt and rent due in a year. The retailer’s revenue for the past 12 months was $95 million, down 20% from a year ago.

“Despite the ongoing macro factors impacting our business, we feel comfortable with our current liquidity and believe it is sufficient to run the business,” Chief Financial Officer Todd Vogensen said on the latest earnings call.

Party City has $157 million in its gun and other levers at its disposal, Vogensen said, such as cutting capital spending and postponing projects. He also intends to raise $22 million from current creditors.

Rite Aid has little debt through 2025, but its short-term lease obligations, at $574 million, weigh on the cash balance of $56 million in May. Over the past four quarters, the company’s earnings have fallen 18% from a year ago.

“Repaying debt is a top priority for our business,” Chief Financial Officer Matthew Schroeder said on the recent earnings call. The company is exploring additional sale-leaseback options on its own stores and expects to derive proceeds from them later in the year.

Rite Aid also plans to use up to $150 million of its $1.7 billion available revolver to buy back outstanding bonds at a discount. This decision will lead to interest savings in the future, according to the company, because revolver loans have a lower rate.

Express, Wolverine and Caleres also have high short-term obligations and low cash on hand, but all have seen earnings improve in recent quarters. All three companies declined to comment or did not respond to a request for comment.

If the economy goes into recession, more businesses will come under pressure. S&P’s Gunter says, “The tighter conditions remain, the greater the risk that vulnerable issuers, regions or sectors will feel the pressure.

Write to Evie Liu at [email protected]

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