Retailers of concern

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.

• Across the board, large bankruptcies dropped to 121 last year from 245 in 2020, according to Bloomberg

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.