Moody’s Predicts Rise in Retail Debt Defaults

A extra cautious client and heavy debt hundreds are placing the squeeze on extra retailers. 

Moody’s Traders Service forecast debt defaults would “speed up,” with the U.S. retail and attire speculative-grade default fee rising to eight.6 p.c for 2023 from 6 p.c at the moment. 

“In a pointy reversal for the reason that benign circumstances of 2021, which lasted by way of September 2022, defaults have since spiked, pushed by a dearth of debt financing, excessive rates of interest, surging prices, declining discretionary items spending and provide chain challenges,” the credit score watchdog stated in a brand new evaluation.

“Robust steadiness sheets at the moment are much more important,” Moody’s stated.

The sector registered seven defaults since September, versus only one throughout the prior yr; amongst them had been the Mattress, Tub & Past chapter and liquidation and Ceremony Assist Corp.’s distressed alternate.   

“Regardless of our steady outlook for the retail sector, circumstances stay difficult,” Moody’s stated. “Whereas retailers ought to profit from normalized freight charges, declining product prices and fewer steep promotions within the second half of 2023, client demand for discretionary items is beneath stress.

“Greater labor expense can also be hitting profitability regardless of decelerating general inflation,” Moody’s stated. “Whereas we don’t count on a return to the pandemic-period 22.5 p.c peak in speculative-grade defaults, the pressures are excessive sufficient to push up misery ranges nearer to the 2017-2019 retail default cycle,” when the default fee stood at 13.6 p.c.

The ranking company pointed to 10 retailers which might be rated B3 and beneath — topic to at the least “excessive credit score danger” within the company’s scale — and have a complete of $4.9 billion in debt coming due between 2023 and 2024. 

Topping this record had been Belk, which is rated Caa3 and has $1.3 billion coming due, and the Qurate Retail Inc.-affiliated Liberty Interactive, which is rated B3 and has $1.1 billion coming due. 

In good instances, even corporations with weaker credit score scores can refinance; they only need to pay extra and restrict their monetary flexibility. However the financing local weather has shifted quickly over the previous yr because the Federal Reserve has ratcheted up the benchmark rate of interest by 5 p.c to struggle inflation.

“Weaker, extremely leveraged corporations proceed to have a troublesome time accessing capital in a market the place buyers stay danger averse,” Moody’s stated. “This can be more and more problematic for corporations on the decrease finish of the ranking scale. Out of the 127 retail & attire corporations, we at the moment fee 16 at Caa1 and beneath — a degree that signifies a excessive chance of default.

“About 60 p.c of U.S. retail and attire corporations rated B2 and beneath have solely floating-rate debt and are subsequently totally uncovered to rising charges,” Moody’s added. “Our evaluation additionally signifies that almost all haven’t any rate of interest protections in place. Usually, the smaller the corporate, the extra probably it’s to depend on floating-rate debt, making it extra susceptible to elevated curiosity prices.”