Default rates for U.S. retailers are poised to climb in the near-term and department store chains and specialty retailers are most at risk.
There are currently nine retailers with a credit risk estimate (CRE)–a measure of an issuer’s one-year forward default probability — that was above 5% at the end of June, according to research firm CreditSights.
That’s based on the firm’s BondScore default risk model, which covers 34 of the 58 U.S. high-yield retailers that are included in the Bank of America Merrill Lynch US High Yield Index. Thirteen of those 58 retailers currently have bonds that are trading at distressed levels, defined as having a yield spread of more than 1,000 basis points above comparable Treasurys.
That’s the premium that investors demand in return for taking on riskier instruments, and reflects the current stress in the sector, which has been ravaged by a now-familiar range of factors, from changing consumer behavior to the rise of e-commerce to sliding mall traffic.
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There has been a slew of bankruptcy filings in the sector this year, including household name stores like Payless ShoeSource, Aéropostale, Gymboree and American Apparel. The BAML US Super Retail Index is currently showing a meager one-month return of 0.28% and a year-to-date return of about 1%, which is close to the other worst-performing sector, energy.
The U.S. High Yield LTM retail issuer-weighted default rate stood at 3.1% at the end of June, while on a debt-weighted basis, it stood at 1.5%.
“While these default rates are…