Despite a drop in the overall high-yield default rate since the end of June, the U.S. retail trailing 12-month (TTM) high-yield default rate rose, following apparel retailer J.Crew’s $566 million distressed debt exchange (DDE). Large retailers such as Claire’s Stores, Sears and Nine West Holdings have a high likelihood of default before the end of the year, according to a new report from Fitch Ratings.
The retail sector rate, which rose to 2.9% in mid-July from 1.8% at the end of June, may reach 9% if those three retailers file for bankruptcy, the ratings agency said. The forecast for the sector at year end, even if Sears and Claire’s do not file, is 5%. The overall high-yield default rate fell to 1.9% in mid-July from 2.2% at the end of June, as $4.7 billion rolled out of the TTM default universe.
“Even with energy prices languishing in the mid $40s, a likely iHeart bankruptcy and retail remaining the sector of concern, the broader default environment remains benign,” said Eric Rosenthal, senior director of leverage finance at Fitch.
DDEs are the leading cause of default on an issuer basis. A total of 146 DDEs have occurred since 2008, with about 40% of those experiencing a subsequent default within an average of 13 months.
The energy default rate reached its lowest point since August 2015. Fitch expects the 2017 sector rate to finish at 2.5% and believes the sector has passed the peak of the default cycle for high-yield energy bonds.
– Adam Fusco, associate editor