Leveraged Loan Defaults in Retail Sector Reach Record High

Leveraged loan default rates in the retail sector have soared to record levels amid the coronavirus outbreak  — and they will likely continue climbing.

According to a report from S&P Global Market Intelligence, the US leveraged loan default rate in retail rose to a record high of 10.34%, pushed along by J.Crew Group Inc. and Neiman Marcus, two companies that entered Chapter 11 bankruptcy this month.

Over the last 12 months, five retailers have defaulted across seven term loan facilities, totaling $4.9 billion, or 16% of all default volume across all sectors, said the S&P report.

Retail loan defaults are expected to keep climbing “substantially” as brick-and-mortar stores,  already faced with online competition and declining foot traffic, “have been dealt a brutal blow by the pandemic,” the S&P report said, adding that prolonged store closures and declining economic activity have prompted even previously solvent entities to lock in liquidity.

Looking at potential future defaults, retail has the second-highest share of U.S. leveraged loans (at the sector level) rated CCC and CC, at 31%, per the S&P/LSTA Index, the S&P report said.

In an earlier report by S&P Global Ratings, an analyst cited eight Index issuers rated CCC+ or lower, implying a 1-in-2 chance of defaulting. These include Academy Ltd., Ascena Retail Group Inc., Belk Department Stores LP, J. C. Penney Company Inc., Jo-Ann Stores Holdings Inc., Party City, Petco and Jill Acquisition LLC.

A default by these triple-C rated retailers “would push the retail default rate to a whopping 31.3%,” said the report.

Overall, the default rate of the broader, $1.2 trillion leveraged loan asset class remains below historical averages, at just 2.53%, according to the May 13 report, citing again the S&P/LSTA Loan Index. Retail makes up just 3.6% of all Index loans.