January 11, 2008

Retailers at Risk?

Even the rich are keeping their hands in their pockets. A report from Bloomberg this morning says that owing to an unexpected decline in December sales at Marks & Spencer Plc, the U.K.’s biggest clothing retailer, that it and other major European retailers could run the risk of defaulting on their corporate bond obligations. As a result, the report goes on to say that credit-default swaps on the Markit iTraxx Hi Vol index of 30 investment-grade companies, including seven European retailers, soared 7.5 basis points to 99.5, according to JPMorgan Chase & Co., the highest since the index was created in 2004.
Here's why that's a bad thing. Credit-default swaps are used to specualte on a company's ability to repay debt and are priced inversely to the risk they present. The greater the risk, the higher the price. Other companies that also saw their credit-default swaps rise where luxury goods conglomerate LVMH Moet Hennessy Louis Vuitton SA, retailer Next, and BAA, a subsidiary of Spanish construction giant Grupo Ferrovial which owns and manages seven airports in the U.K., including London's Heathrow, Gatwick, and Stansted.

The report went on to say that in the U.K. consumer confidence fell in December to the lowest in 10 months, according to the Nationwide Building Society.

But companies like LVMH still have plenty of padding to keep them warm during lean times. In June, when the company announced its half-year results, reported more than €1.4 billion ($1.8 billion) in operating profits.

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