What happened
The stock of L Brands (LB +4.35%) soared more than 12% on Tuesday despite receiving a credit downgrade from ratings agency Moody's, which cited the rising likelihood that its deal to sell controlling interest in the Victoria's Secret brand would not be completed.
So what
A downgrade with the likelihood of default is not typically what sends your stock soaring, but investors may be heartened by the prospects of the country's economy reopening, which would allow retailers like L Brands to start generating revenue again.
Image source: L Brands.
The death of the Victoria's Secret deal is not so certain either, as L Brands is pressing its case to force private equity firm Sycamore Partners to buy the lingerie company, and L Brands believes that case has a good chance to succeed.
Now what
Even with today's gain, L Brands shares are down 56% over the past year, therefore much of the potential downside to the deal falling through has been baked in.
Yet problems remain in thinking the worst is behind the retailer. Even if L Brands is successful, the deal will be significantly delayed, which Moody's notes increases the chances it burns through its cash available. And turning Bath & Body Works into a major growth concept, while possible, is an uphill climb in the current environment.
But hope springs eternal, and reopening the economy is proving to be a bigger driver of investor sentiment.
