Credit rating agency Fitch Ratings downgraded Nordstrom's (NYSE:JWN) corporate debt on Wednesday, citing the impact of the COVID-19 epidemic and its potential effect on consumer discretionary spending through 2021.
Fitch dropped Nordstrom's long-term credit issuer rating one notch, from "BBB+" to "BBB," with a negative outlook. While Nordstrom's debt is still considered investment grade (the highest rating assigned to corporate issuers), it's now just two notches above speculative or "junk" status.
As a primary reason for the downgrade, Fitch cited a projected surge in Nordstrom's leverage ratio from 3 times to 7 times by the end of this year, based on an expected decline in EBITDA (earnings before interest, taxes, depreciation, and amortization) from $1.6 billion in 2019 to $550 million in 2020.
While the ratings demotion isn't great news for Nordstrom, Fitch did point out a few positives in its report. The ratings specialist believes Nordstrom has adequate liquidity to weather both its current store shutdown and a significant drop in consumer spending for full-year 2020.
Fitch pointed to $850 million in cash Nordstrom's coffers as of its last balance sheet date, as well as $800 million the company recently accessed by drawing down its revolving short-term credit facility. Coupled with the curtailment of capital expenditures and the suspension of dividends and share repurchases, the company appears to be adequately resourced for the present. Fitch expects Nordstrom will also be able to pay $500 million in debt due in October 2021 using cash on hand.
Still, the downgrade will have near-term consequences, likely making it more expensive for Nordstrom to borrow in the corporate credit markets. Shares were down 12.5% in early afternoon trading on Wednesday.