Party City bumps retail high-yield default rate higher

The default rate for retail high-yield bonds rose with Party City's bankruptcy, and Fitch Ratings forecasts it will rise further with Bed Bath & Beyond's likely imminent default.

Why it matters: After a brief respite, a number of issuers are struggling with large debt loads after making poor strategic decisions.

The big picture: After the pandemic forced what amounted to an industry-wide restructuring, record default rates were followed by a year of calm in which there were limited retail defaults. The honeymoon is over.

• Consumers are no longer spending with the wild abandon they did in 2021.
• In fact, retail along with telecommunications and media will account for half of this year's total high-yield default volume, Fitch states.

Details: Party City's bankruptcy alone lifted the high-yield default rate from 0.2% at the end of 2022 to 1.7%, per Fitch.

• Bed Bath & Beyond could push it up further to 3.2%, says Eric Rosenthal, senior director of leveraged finance at Fitch.
• And up next could be Carvana, which has more than $5.7 billion in bonds outstanding. Its potential default would drive the high-yield default rate even higher to 12% this year.
• In addition, pharmacy chain Rite Aid, with nearly $1.36 billion in bonds outstanding, is also sitting on Fitch's Top Market Concern Bonds list.

Of note: On Fitch's Tier 2 Market Concern Bonds list are 99 Cents Only Stores, with $350 million in bonds outstanding, and Shutterfly, with nearly $1.1 billion in bonds outstanding.

Between the lines: That would bring default rates nearly back to 2020 levels after sitting at 1.6% at the end of 2022.

• The high-yield default rate for retail stood at 13.7% in 2020 after an active year of pandemic-induced restructurings in and out of court.

Catch up quick: The distressed debt exchange Bed Bath & Beyond attempted to broker late last year would have lifted the high-yield default rate even higher, but the home goods retailer ended up canceling it earlier this month.

• Note that the rating agencies already slapped the company with the "selective" or "limited" default designation.
• That means the retailer still has more than $1 billion in bonds not yet baked into the default rate.

What's next: The next Fitch update on leveraged loans will come out in two weeks, giving us a fuller picture. which will also show the impact of Party City and Bed Bath & Beyond.