Small Business Tax Advice: Paying Dividends

Black friday could shine light on troubled us retail loans

Loan investors are watching the holiday shopping season for signs of respite as struggling US retailers, including ‎sporting goods retailer Bass Pro Shops, face resistance and higher financing costs in the leveraged loan market. The Retail Federation is predicting that retail sales in November and December will increase a solid 3.6% from last year to US$655.8bn and ‘Black Friday’ – the Friday after Thanksgiving – will be the biggest sales day of the holiday season for many retailers. Retail borrowers in the leveraged finance world have been hammered over the past 18 months as many brick-and-mortar chains continue to cede business to online sellers. “Like most sectors, retail remains a ‘have and have-not’ story when it comes to performance and access to debt capital,” a banker said. Average bids in the retail sector in the US secondary loan market of just over 95% of face value have been falling since mid-2015, when average bids were 98.5, according to Thomson Reuters LPC data. Retail sector average bids remain well below the average bid on the SMi100 of 98.64, the data shows. Retailers such as Toys “R” Us and fashion company Claire’s Stores have been struggling in the leveraged loan and high-yield bond space for years.  Toys “R” Us' term loan due in 2018 is trading at 95.5 after hitting lows of 70 in January and Claire’s Stores’ 7.75% notes due in 2020 are trading at 12.  Threats of a potential economic pullback are not helping, especially coupled with uncertainty over the economic direction of the country after Donald Trump beat Hillary Clinton in the US presidential election.

BIG NAME Bass Pro Shops is the latest big name to run into resistance in the loan market in November. In October, G-III Apparel Group had to increase pricing to 525bp over Libor with a 1% floor from guidance of 450bp-475bp on a US$650m term loan supporting its purchase of clothing brand Donna Karan. Bass Pro marketed a US$3.37bn term loan B and a US$500m asset-sale facility to support its acquisition of hunting and fishing specialist Cabela’s Inc. The company cut the size of a term loan B to US$2.97bn and increased pricing to 500bp over Libor with a 0.75% floor from initial guidance of 425bp over Libor after a weak response. Pricing on a US$500m loan, which will be repaid by a planned asset sale, was also increased to 475bp over Libor with a 0.75% floor after originally being offered to investors at 400bp. The company also added a US$400m term loan A that was made available only to relationship banks to cover the decreased size of the term loan. Term loan As are usually held by bank lenders and are more of a relationship play than B loans that are sold to a broader set of institutional buyers, including hedge funds, mutual funds and Collateralized Loan Obligation (CLO) funds.

Bankers and investors said they were not surprised to see the deal struggle as the retail sector has already seen many troubled names including American luxury department store Neiman Marcus and clothing company J. Crew. Apparel retailers have been hit particularly hard as they struggle to stay relevant in the fast-changing world of fashion. J. Crew’s term loan due in 2021 is trading at 68.67. The Neiman Marcus term loan due in 2020 is trading at 91.86.“There have been a number of high profile names within the high-yield/levered loan space that have struggled for years,” said Michael Terwilliger, global portfolio manager at Resource America, an investment company. “These high-profile struggles – even among well respected brands such as Neiman Marcus and J. Crew – will create a very challenging backdrop for retail credit going forward.”TOO EARLY TO CALL Political uncertainty has also added to concerns, although it is too early to say which way things will break under a Trump administration, say analysts. The president-elect’s policy proposals hint at the potential for the dollar to rise, which has already had a negative impact on some retailers, according to a November 9 report from Citigroup.

“Luxury retailers and department stores have been plagued by weaker tourism spend as the USD has strengthened against most global currencies,” the report said. However, the potential for lower taxes for both individuals and corporations could help discretionary spending, the report also said. Prior to the election, US retail sales came in better than expected in October, increasing 0.8%. Even when some deals have been challenging, there are some individual cases where banks are willing to underwrite for retailers with a good credit story. Goldman Sachs agreed to provide the debt to back online jeweler Blue Nile Inc’s US$500m buyout by Bain Capital and Bow Street, which was announced November 7. “Clearly there is a receptive audience for proven stories that have performed through recessions, but generally investors remain cautious on retail given most believe we are due for an economic pullback in next 18-36 months,” said the banker. But these are expected to be few and far between until companies in the sector are able to find a way to make their businesses more successful.“It's difficult to envision the market being willing to underwrite new retail LBOs amid what seems to be rather dramatic structural changes in the industry,” Terwilliger said.

Navigating the College Savings Programs

As a parent, the big financial concern with a newborn is how to set aside enough money to assist for a college education. Universities and state governments have developed many different financial savings plans to encourage parents to save money for college. Some of the plans include 529 accounts, Coverdell accounts, Roth IRAs and prepaid/guaranteed tuition costs. Unfortunately, few of the programs offer every benefit such as tax deductions, tax deferred savings, unlimited investment options, self directed investments and no penalties.

Selecting a university is a critical and expensive decision, and in my view it is foolhardy to make before the last couple years of high school. A drawback of the university-based or state-based plans (such as a 529 account) is that they impose penalties if a child doesn’t attend a specific university or in a specific state. Who knows what aptitudes, skills or interests your child may develop that necessitate a specific school that is out of your home state. University and state-based plans also impose penalties if the money isn’t ultimately used for qualified college expenses; another example where an event that is out of your control and may cause an unneeded expense. But the biggest problem with university and state programs are the financial rule changes they make – after you start the plan.

To me, the university and state-based programs are a lose/lose savings plan for parents. If the cost of tuition rises faster than forecasted, in spite their guarantees, they raise the price and leave you under-funded. Conversely, if tuition rises less than forecasted, then you end up overpaying for tuition. And the same applies to the stock market some plans force you to invest in; when the market fell in 2000 and 2001, many plans broke their promise to guarantee full tuition funding in spite of promises to the contrary.

Another drawback of state-based plans is that your investment options are severely limited to a few mutual funds run by the brokerage firm operating the account. I have evaluated several: and they have high fees and poor returns, and I’m wary of the lack of competition for many of these accounts. The brokerage firms blame economics for the lack of investment choices, saying that most of the accounts are small and not very profitable for them, so they want as little trading and customer interaction as possible.

The federal college savings plans are better because they allow the widest selection of investments (such as an educational Roth IRA or other education savings accounts), and can be applied to most any accredited university. These accounts offer tax-free growth and withdrawal is also exempt from federal taxes and some states taxes. Realistically, your situation may call for multiple accounts. Rules prohibit you from using these if your income passes certain thresholds.

In my opinion, the best place to start saving college is with U.S. government ibonds from These bonds offer the most flexibility and control, and require none of the paperwork and rules of other savings plans. They accrue a decent rate of interest every month, the principal is adjusted for inflation each quarter, the income tax is deferred, and you don’t have any brokerage fees. And when the money is withdrawn for a university on their approved list, the money can be redeemed tax-free. (As for limiting rules: you cannot withdraw the money in the first year, and if you withdraw it within five years, there is a three month interest penalty – so ibonds are not the best savings plan after a child reaches about age twelve). Since ibonds are simply savings not an educational account, the money can be spent for any type of expense that may arise.

The government and brokerage firms keep updating these accounts, so my complaints will hopefully become moot in the near future. But the criteria that you need to watch for are: many investment options, few penalties, no taxes and total control. These will maximize the money you’re setting aside for that expensive degree.