November 17, 2022
Welcome to Thursday, Retail readers. Just one more day to the weekend.
Situational awareness: Department store retailers reported mixed results this morning, with Kohl's pulling its full-year forecast citing economic volatility and Macy's raising its forecast after beating expectations.
1 big thing: Eyes on retail's default rate
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 Richard.
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 yesterday, 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.