Saks downgraded as S&P flags risk of default amid 600m dollar rescue deal

Saks Fifth Avenue, the storied American luxury department store, has seen its credit rating slashed to near-default levels by S&P Global Ratings. There are growing concerns about the company’s financial health and its ability to meet obligations to creditors, including fashion brands and suppliers still awaiting payment.

S&P downgraded Saks’ issuer credit rating to CC, reported Bloomberg, 10 notches below investment grade, citing a 600 million dollar rescue package that includes a debt restructuring deal. In plain terms, the agency views Saks’ latest financing manoeuvre as akin to a default. “The downgrade reflects our view that the proposed financing transaction is tantamount to a default,” the agency said.

A complex lifeline

The package involves a 300 million dollar emergency loan from a group of investors who hold just over half of Saks’ 2.2 billion dollars in high-yield bonds, issued only in December last year. Crucially, these lenders would be first in line to be repaid if the company were to go under.

Also included in the deal is a 400 million dollars first-in, last-out (FILO) asset-based credit facility, a complex form of lending that gives priority to new lenders for repayment in the event of insolvency. Of this, 100 million dollars will be funded by exchanging existing senior secured notes.

A further 200 million dollar is being committed, though that funding is contingent on certain conditions being met.

The reshuffling of debt priorities has alarmed rating agencies and investors alike, particularly given the scale of Saks’ outstanding obligations and deteriorating operations.

Brands left waiting

Although S&P did not disclose specific figures owed to vendors, industry insiders say fashion labels and designers — many of them small or independent — have been left in limbo, waiting on delayed payments for inventory already delivered. Sources familiar with the matter previously told The Business of Fashion and WWD that Saks has amassed a backlog of payables stretching across multiple seasons.

Such delays can put considerable strain on suppliers, especially in the luxury segment where production cycles are long and capital-intensive.

Operating pressures mount

S&P cited “a pronounced deterioration in operating performance and liquidity challenges” as major factors behind the downgrade. At the start of February, Saks’ borrowing capacity under its 1.8 billion dollar asset-based loan had dropped sharply to just 415 million dollars, a sign of cash constraints exacerbated by a seasonal inventory build-up and overdue bills.

The retailer’s struggles come despite owning prime real estate, including its iconic New York City flagship, valued at more than 4 billion dollars on a net basis. However, S&P noted that Saks has been unable to convert these assets into cash quickly enough to meet pressing obligations.

"We believe the company’s market position will weaken as competitors with greater financial capacity expand their business operations," S&P stated. "Management has focused on negotiating longer terms with its main vendors and addressing overdue payments to improve its working capital management."

Trouble at the top?

Saks’ woes follow its ambitious consolidation moves in 2023, when its parent company, Hudson’s Bay Company (HBC), acquired rival luxury chains Bergdorf Goodman and Neiman Marcus. While the mergers were intended to create a North American luxury retail powerhouse, they have also added complexity and risk to the balance sheet.

Now, faced with shrinking access to credit and nervous suppliers, Saks is under pressure to stabilise its operations while maintaining the high standards expected of a luxury brand.