Major retail companies have long been coping with the threat of online giants like Amazon (NASDAQ: AMZN). Retail is also hurting elsewhere: in the looming debt large retail companies are dealing with.
This debt is putting severe pressure on the industry. Retail bankruptcies have hit an all time high. And it's not just the retail industry; the energy and telecommunications industries are fighting to stay afloat amid emerging debt strains. Several are facing rising interest rates that are weighing down highly leveraged companies.
Companies are finding their credit ratings downgraded from investment grade to speculative. This makes it harder to find rates on their rising debt, making it in turn more stressful to pay down debts. Retail companies such as Neiman Marcus, PetSmart (NASDAQ: PETM) and Sears (NASDAQ: SHLD) have all seen their credit downgraded to speculative.
The risk to investors - and the interest the companies must pay for new borrowing - rises, adding to cash flow stress. When the stress is great enough, companies can fail.
But not all retailers are suffering the backlash of competition from online giants. Some have adapted to online competition with effective online shopping options.
The New York Times reports that mainly the department store model is being disrupted by Amazon. On the other hand, the home improvement giants are seemingly unaffected, with Home Depot (NYSE: HD) and Lowe's (NYSE: LOW) are doing quite well. The energy industry is another eye catcher for investors, where analysts are seeing rising debt becoming a burden for several large companies.
Oil and gas companies carry large loads of lower-rated debt that is due to mature in the next five years, according to S&P. New fracking technology has helped to expand domestic oil and gas output and loosened the Organization of the Petroleum Exporting Countries' grip on prices. But as the new supply depresses prices, it also pinches cash flow.
Fourteen of sixteen midsize and larger drillers tracked by Gordon Douthat, a director of equity research at Wells Fargo Securities, had higher capital spending costs than cash flow last year.
One central problem is the modest level of oil prices that, despite a recent rebound, remain well below highs of over $100 a barrel. Many analysts expect the prices to remain around $60 a barrel, citing that the days of $70 plus barrels may be a thing of the past.
Lastly, the telecommunications industry is facing a debt problem of their own, with increased price competition putting a strain on the entire sector.
Several large companies in the industry have taken on loads of debt. Those companies include Frontier Communications (NASDAQ: FTR), Sprint (NYSE: S), CenturyLink (NYSE: CTL), and Verizon (NYSE: VZ), although Verizon has a special case.
One important positive for Verizon is that it has the premier wireless network. But the cost of upgrading that network may also be a vulnerability. Rolling out 5G wireless network faces widespread opposition and is a fairly expensive item to install. However, it could mean a large pay off in terms of users once implemented.
Outside the energy, telecom, and retail industry's, debt is high for much of corporate America but manageable. Several corporations are taking advantage of the recent historically low rates and borrowing heavily, and their repayment abilities are not affected due to the low rate environment in the past and strong prevailing economic conditions.