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Probability of default for U.S. retail increases

Richard Collings
Jul 27, 2022
Note: Probability of default scores calculated using S&P Global Market Intelligence's Market Signal probability of default model, which is based primarily on volatility of share prices, taking into account country and industry-related risks. Data: S&P Global Market Intelligence; Chart: Erin Davis/Axios Visuals

The one-year median probability of default for all of retail increased to 4.5% in July from 4.2% in June, according to S&P Global Market Intelligence.

Why it matters: Consumers are still spending, as S&P's data and analytics division notes, but profit margins are taking a hit due to inflation and excess inventory. And rising interest rates, which increase borrowing costs, remain "worrisome," according to Fitch Ratings.

The big picture: S&P's ratings arm pointed out that the U.S. distress ratio has increased to its highest level since October 2020, more than doubling to 9.2% as of July 5 from 4.3% as of June 3.

  • And retail is the top industry with a distress ratio of 17.7%, up from 16% in June, with forest products and building materials not far behind at 17.2%.

State of play: Retail bankruptcies remain low, as we previously reported, but have increased in size and frequency in recent months.

  • Through May, S&P Global Market Intelligence only recorded three bankruptcy filings, but in June and July, there have been five, headlined by Revlon.
  • Bed Bath & Beyond was also quickly moved to the top tier of Fitch's watchlist for potential defaults.
  • Kohl's was revised to a negative outlook by S&P Global Ratings (separate from S&P Global Market Intelligence). A downgrade from BBB- would reclassify the issuer as non-investment grade.
  • 99 Cents Only Stores and Rite Aid are both rated CCC+ by S&P, while Bed Bath & Beyond, GPS Hospitality and Party City are rated B-, all with negative outlooks.

What they're saying: "Multiple headwinds including tighter financing, lower growth prospects, and geopolitical tensions intensifying supply chain pressures all weigh on lower-rated U.S. issuers," S&P Global Ratings noted.

Meanwhile, it's not just S&P pointing out the deterioration of retail's financial health. Fitch also said the sector could see higher default rates in 2023 in both high-yield bonds and in leveraged loans.

  • Fitch's U.S. Top Market Concern Loans watchlist for possible default includes Men's Wearhouse (Tailored Brands), Boardriders, Isagenix, Nine West Holdings and Outerstuff.
  • On the second tier of that list are Varsity Brands, Belk, Shoes for Crews, Cole Haan and Bob's Discount Furniture.
  • Carvana is on Fitch's U.S. Tier 2 Market Concern Bonds watchlist, as is 99 Cents Only Stores.
  • In recent months Moody’s has also downgraded several retailers, including Michaels, Jo-Ann Stores, Ocado and Macy’s.
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