Apr 5, 2017
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Fitch sees U.S. retail defaults rising to 9 percent in 12 months

Apr 5, 2017

The default rate among U.S. retailers will jump to 9 percent, equivalent to $6 billion worth of debt, in the next year as consumers keep gravitating to discounters and online shopping, Fitch Ratings said on Wednesday.

Payless ShoeSource is the latest U.S. retailer forced into bankruptcy due to declining bricks-and-mortar traffic. - REUTERS/Carlo Allegri

The rating agency's view came the day after Payless ShoeSource filed for Chapter 11 bankruptcy, raising the sector's default rate to 1 percent from zero in March.

"Fitch's expectation of increasing retail defaults stems from increased discounter (including off-price and fast-fashion apparel) and online penetration, and shifts in consumer spending toward services and experiences," it said in a statement.

Payless was on Fitch's "loans of concern" list due to its risk of default within 12 months.

Retailers that rely on sales from stores that stand alone or are in shopping centers have struggled, leading some traders to bet on declines in those stocks and on property bonds with heavy mall exposure, analysts said.

"Brick-and-mortar retailers are facing increasing competition from their purely online counterparts, and this is being reflected both in decreasing sales and foot traffic, as well as lower stock prices," Citi analysts Anindya Basu and Calvin Vinitwatanakhun wrote in a research note on Wednesday.

The CMBX series 6 BBB- index index, which tracks one group of commercial mortgage-backed securities, has fallen about 10 points in price since late January to 87 on Wednesday due to its high exposure to shopping malls, they said.

The level of bearish bets against these securities may be overdone, as the average CMBS exposure to malls is less 10 percent, the Citi analysts said.

They instead recommend buying credit default swaps on a basket of retailers as protection against defaults.


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