Fitch Ratings has increased its U.S. retail trailing 12-month (TTM) loan default rate on the back of Payless ShoeSource’s bankruptcy filing on April 4. The ratings agency expects the rate to go much higher from continued challenges in the retail sector.
The loan default rate fell to 0% in March after reaching a level of 0.5% in February. Fitch expects the rate to hit 9% over the next 12 months, equaling about $6 billion in defaults, due to increased discounter and online penetration as well as a shift in consumer spending toward services and experiences. The vicissitudes of brand popularity are also a factor in the competitive retail environment that has seen negative cash flow, tight liquidity and unsustainable capital structures, according to Fitch.
Payless was on Fitch’s Loans of Concern list. Eight other retailers on the list with a significant risk of default include Sears Holding Corp., Gymboree Corp., Nine West Holdings Inc. and rue21 Inc.
Payless’ Chapter 11 filing was intended to facilitate a balance sheet debt restructuring and operational overhaul. It intends to emerge as a smaller concern. Liquidation sales are planned for 400 out of 4,400 underperforming stores that are pegged for permanent closure. To reduce debt by 50%, the company has entered a plan support agreement with parties that hold about two-thirds of its first-lien and second-lien debt.
– Adam Fusco, associate editor