Dive Brief:

• S&P Global downgraded Party City’s corporate credit rating, giving it a junk-level CCC+ rating, down from B, according to a press release emailed Thursday.
• Analysts with the ratings firm cited sales and margin declines in the fourth quarter for the party retailer. They also noted that, “we believe the company will face significant headwinds related to the expanding coronavirus pandemic and the weaker economic outlook.”
• S&P gave the retailer a negative outlook, indicating further potential downgrades “if macroeconomic conditions deteriorate further, which would diminish the likelihood that it will be able to refinance its sizable debt obligations as they come due,” the analysts said.

Dive Insight:

Party City is among the retailers that started 2020 with a weakening or imperiled market position: falling sales, falling margins and negative profits. And then came the spread of COVID-19, which upended the retail world as malls close and many shoppers avoid the stores still open. 

Along with dozens of others, Party City has voluntarily closed all its stores through March. A difficult decision, no doubt, for a company that has already weathered massive sales declines in its recent history. For some retailers, the closures could mean a 50% hit to earnings for the entire year, according to an estimate from Cowen.

The impact is likely to be even more deeply felt by financially weak or indebted companies. And even once stores re-open, the novel coronavirus pandemic could continue to depress social gatherings — a big problem for a retailer like Party City which caters specifically to social gatherings. 

“The negative outlook reflects the substantial risks to Party City’s operating performance given its weak results in the second half of 2019, the continued challenges and execution risk it is facing as management works to execute their strategic initiatives, and the anticipated substantial decline in its demand due to the coronavirus outbreak,” S&P analysts said. 

The other elephant in the room is Party City’s long-term debt, which stands at $1.6 billion. The retailer has a term loan due in 2022, as S&P analysts noted. Refinancing will only get tougher as the pandemic and global economic slowdown rattle credit markets. S&P analysts said that they see an increasing likelihood that Party City will be unable to refinance its debt at its original face value.