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Eyes on retail's high-yield default rate

Illustration of a person walking off the edge of a hundred dollar bill.

Illustration: Shoshana Gordon/Axios

Bed Bath & Beyond's distressed debt exchange involving nearly $155 million of bonds lifted the high-yield default rate for the retail sector to 0.2% from 0%, according to Eric Rosenthal, senior director of leveraged finance at Fitch Ratings.

Why it matters: "This is the first retail default since Guitar Center in November 2020," Rosenthal tells Axios.

State of play: Among retailers on Fitch's Top Market Concern Bonds watch list are...

  • Automotive retailer Carvana, with about $5.7 billion in bonds;
  • Pharmacy chain Rite Aid, with about $1.5 billion in bonds;
  • Party supplier Party City, with about $1.2 billion in bonds;
  • Bed Bath & Beyond, with nearly $1.2 billion in bonds.

Details: But that may be about to change as the macro economy weighs on the weaker issuers with rumblings of more trouble ahead.

  • Rosenthal says that if Bed Bath & Beyond ends up defaulting on all its debt, the default rate for retail will increase to 2%.
  • He projects that the high-yield default rate could even soar to 11% next year, driven by Carvana.
  • And Party City could bump that even higher yet, Rosenthal says.

Of note: Just Wednesday, Bed Bath & Beyond said that it is extending the offer it made back in October for those bonds that remain outstanding.

Between the lines: Traditionally a default rate in the high single digits or above for a sector indicates sector-wide distress.

Yes, but: Given all that, the default rate was at 0% and for now remains low.

  • That rate will rise to 0.5% if Rite Aid carries out its distressed debt exchange for up to $200 million slated for Dec. 2, Rosenthal says.
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