Retailers borrowed $30 billion in the first half, and the full-year total may top 1996's $41 billion by 50%, according to Andrew Hensel, a vice president in BankAmerica Corp.'s loan syndications and trading research group.
The largest area of activity has been in grocery stores, where a number of loans were made to acquisitive superregional chains such as Kroger Co., Bruno's Inc., and Safeway Inc.
The volume of supermarket loans totaled about $11 billion in the half, according to Mr. Hensel.
Unlike most other retail sectors, grocery stores have high and stable cash flows largely unaffected by consumer trends or the economy. That permits them to take on more debt relative to revenues to fund acquisitions, which in turn provide cost savings.
"In the food sector, which is the one sector which has tolerated more leverage, you're seeing more deals being refinanced at lower prices, as well as a lot of consolidation," said Paul E. Rigby, managing director and head of retailing at First Chicago NBD Corp. "We expect that consolidation to continue."
Only a handful of large grocery chains are growing, Mr. Rigby said; smaller chains and independent operators are selling out or disappearing.
Among nongrocery retail chains, some of the largest credits to come to market were refinancings that reflected improving financial health. Chase Manhattan Corp.'s $2.5 billion loan for Kmart Corp. was a case in point.
The recovery partly reflects the spinoff of noncore businesses by a growing number of discounters, such as Kmart, said Filippe M. Goossens, a vice president in credit risk management at J.P. Morgan & Co. "Conglomerates don't work anymore," he said.
Apparel retailer The Limited is one such company. It recently sold its holdings in Abercrombie & Fitch and Intimate Brands, which runs the Victoria's Secret lingerie shops.
These divestitures created opportunities to advise and refinance the parent company and lend to the newly independent operations, said Mr. Goossens.
Department stores and variety stores accounted for $6 billion and $5.4 billion in loan volume, respectively, in the first half, according to data from BankAmerica. Those sectors registered the biggest improvements in credit quality, as companies that had been over-leveraged pared down their debt.
Federated Department Stores returned to investment-grade status after its bankruptcy last year and refinanced its $2 billion loan.
Bankers' increased confidence in the sector has been reflected in tighter spreads and looser credit structures.
"As peoples' perception of who the successful companies are going to be have solidified, they've shown a willingness to extend credit in fairly sizable dollar amounts," said Mark R. Smith, senior managing director and head of syndications at First Chicago NBD.
The universe of top-shelf retailers is shrinking, and as their finances improve the competition for their loan business heats up, observers said.
One rapidly expanding department store chain, Proffitt's Inc., a noninvestment grade borrower, recently refinanced its three-year secured $275 million credit in favor of a five-year unsecured loan.
Proffitt's ability to negotiate such appealing terms shows how eager banks are to work with one of the few companies still in the market for acquisitions, said Mr. Goossens.
