Easy money is a boon for borrowers, but eventually the bill comes due with interest. See luxury retailer Saks Global, which is teetering on the brink of bankruptcy after splurging on debt.
Saks has been in business since Andrew Johnson was President, but in recent years it has struggled amid online and other competition. Luxury labels are selling more merchandise in their own boutiques. Higher-end department stores like Nordstrom and Bloomingdale’s are drawing well-to-do customers with bigger discounts.
Competition led to the bankruptcies of upscale department stores Barneys in 2019 and Lord & Taylor in 2020. Saks’ solution was to acquire upmarket retailers Neiman Marcus and Bergdorf Goodman in 2024. The merger required Saks to take on $2.2 billion more in debt, which S&P gave a junk rating.
Jefferies Financial Group, the lead underwriter on the bond offering, boasted at the time that it was one of the biggest junk-rated deals ever completed for a retailer. That worked for Jefferies, not so much for Saks. Within months of the deal closing, Saks fell behind on paying vendors. Designer brands pulled back from selling labels in its stores, and sales declined.
Saks issued more debt last summer, though this didn’t much alleviate its problems. Sales fell further as brands stopped shipments and customers faced delays getting refunds. The company missed a $100 million interest payment in late December, which has prompted worries among senior creditors that the bond covenants aren’t air-tight.
When monetary conditions are loose, market discipline erodes. Creditors ease underwriting standards and perform less diligence.
Textbook examples are the spectacular failures of subprime auto lender Tricolor and auto supplier First Brands last year. Creditors blame fraud, though they seem to have missed bright red underwriting flags. Jefferies last week reported a $30 million hit from First Brands’s collapse. “There clearly are lessons to be learned,” Jefferies said.
The troubles at Saks are related to debt and business competition, not fraud. But its struggles offer lessons for investors — and government. A combination of goliaths isn’t destined to succeed, as antitrust cops often assume. And easy money can backfire on the unwary.
