Retail Leveraged Loan Default Rate Hits Record 18.9% in August

The leveraged loan default rate for retail continues to soar, reaching 18.9% in August from 17.5% at the end of July following the bankruptcy of apparel retailer Tailored Brands, the parent of Men's Wearhouse and Jos. A. Bank, according to credit rating agency Fitch. The figure continues to hit new historic highs not even seen during the depths of the financial crisis roughly a decade ago, when the retail loan default rate hit 5.7% in 2009. During the so-called retail apocalypse of the last few years, the rate would reach a new high of 8.2% in 2017, still historically elevated and even more glaring considering that the U.S. was experiencing continued economic growth. But the pandemic is proving the adage that things can always get worse: The rate could potentially reach as high as 25% by the end of the year, the rating agency projected, if department store retailer Belk and crafts supplier JoAnn Stores also end up defaulting. It underscores just how devastating the coronavirus outbreak has been for merchants—retail began the year with a default rate of 7%. Defaults come in many forms, the most well-known of which is filing for bankruptcy. But companies can also default on their debt if, for example, lenders agree to swap debt for equity out of court or the borrower misses an interest payment on its loans. The leveraged loan default rate itself is a percentage of the outstanding amount for all retail loans that went into default during the past 12 months, and is a measure of the sector’s overall health. For comparison, the current default rate for all loans across industries is 4.3%. Though significantly lower than the retail number, it's nothing to cheer about: According to Fitch, that is the highest it has been in more than 10 years. Retail accounts for 20% of the total year-to-date default volume across industries, the highest of any sector. Retail is also the most distressed of all sectors, surpassing energy for which the default rate is 15.9%. Meanwhile, the industrial and manufacturing sector is third with a 9.3% rate, while the leisure and entertainment industry's rate is fourth at 7.9%. In fact, leisure and entertainment could see 40% of its current loans, amounting to some $47 billion, in default by the end of 2021, driven by movie theater chains and gyms, among which Town Sports International is considered the most vulnerable.