S&P Downgrades Bon-Ton Stores (BONT) to 'CCC'; Outlook is Negative

S&P Global Ratings lowered its corporate credit rating on the The Bon-Ton Stores Inc. (Nasdaq: BONT) to 'CCC' from 'CCC+'. The outlook is negative.

At the same time, we lowered the issue-level rating on the company's second-lien senior secured notes to 'CCC-' from 'CCC;, commensurate with the corporate credit rating. The '5' recovery rating remains unchanged, indicative of our expectation for modest recovery toward the lower end of the 10% to 30% range in the event of a payment default or bankruptcy.

"The downgrade reflects our revision of the company's liquidity to weak, increasing refinancing risk for an upcoming debt maturity in mid-2017, and that a default is likely within 12 months absent an meaningful turnaround in operating results," said credit analyst Mathew Christy. "Our view considers the June 20, 2016, announcement that a previously agreed upon sales-leaseback of three company-owned stores was terminated, which we believe suggests sustained industry weakness and operating performance for Bon-Ton."

The negative outlook reflects our view that a default could occur in the next 12 months given the company's eroding liquidity following the termination of the company's sales-lease back transaction and our expectation for protracted weakness in the operating environment. Bon-Ton also faces increasing refinancing risk for upcoming debt maturities absent a meaningful improvement in operating performance.

We could lower our ratings if we believe a default is inevitable within the next six months. This could occur if continuous operating performance deterioration is worse than our base-case assumptions, leading to an acceleration in ABL borrowings and a further erosion in liquidity, which would cause the company to seek a capital restructuring.

A higher rating is unlikely in the next 12 months given the declining operating performance trends, an unsustainable capital structure, and our view that the company does not generate sufficient cash flows to support its operations, interest burden, and refinancing needs. A positive rating action would be predicated on a significant turnaround in operating performance, leading to a significant improvement in the company's cash flow generation and liquidity position.

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