Jan 7, 2022 - Economy

Retailers of concern

A U.S. greenack bill is wedged between two closing retail shop doors

With the Omicron variant hitting foot traffic and causing labor shortages, several banners are being closely watched by rating agencies for a potential default.

Why it matters: Fitch has previously said that the leveraged loan default rate for the retail sector was projected to fall to its lowest level since 2016.

Yes, but: Not all retail merchants are out of the woods, thanks to that swirl of factors.

State of play: Rating agencies are eyeing apparel retailers Tailored Brands (owner of Men's Wearhouse), Boardriders, J.Jill and Belk. They're also eyeing Isagenix, a multi-level marketer of dietary supplements, and discounter 99 Cents Only Stores.

  • These companies are rated either at or below Caa1 (Moody's), CCC+ (S&P) or appear on Fitch's "top market concern loans" watchlist.
  • For Moody's, a rating of Caa indicates "very high credit risk." To S&P, a CCC rating indicates vulnerability to and dependency on current economic conditions. To get on Fitch's watchlist, a number of negative factors need to be counting against you

The other side: "Tailored Brands continues to see positive momentum... We outperformed our business plan in the third quarter, delivering strong year-over-year revenue and EBITDA growth, and we remain incredibly optimistic about our trajectory as we enter the new year," the company said in an email.

  • Boardriders, a portfolio company of Oaktree Capital Management, and the parent company of action sports brands Quiksilver and Billabong, as well as department store chain Belk, a portfolio company of Sycamore Partners, declined to comment.
  • The other companies did not respond to a request for comment.
  • Note that J.Jill was upgraded by Moody's in October from Caa2 to Caa1 due to improved operating performance and positive EBITDA.

By the numbers: The leveraged loan default rate as of the middle of December, according to Fitch, was 4.4%, a major improvement from 16.7% at the end of 2020. The agency projects that rate to fall even further to 3% by the end of this year.

  • A default rate in the high single digits implies that a sector is distressed.

The bottom line: While challenges still abound for retailers, it's still too soon to tell what the ultimate impact of Omicron will be, according to David Silverman, a retail analyst at Fitch.

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