Feb 15, 2017
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Secondary prices volatile for US retailers hit by technological disruption

Feb 15, 2017

US investors are assessing the volatile secondary loan prices of companies that are being hit by technological disruption as textbook publishers join specialty retailers on a growing list of sectors facing long-term 'secular' change.

Photo - Chain Store Age

This dip follows steeper falls in specialty retailers such as department chain Neiman Marcus and womenswear retailer Ascena Retail, which are battling internet shopping models. Neiman Marcus is trading below 80% of face value and investors are evaluating positions and sector exposure.

"We are looking at all our retail names to see the impact from online competition," said an investor at a Collateralized Loan Obligation (CLO) fund.

Retail remains the most depressed sector in credit, according to S&P with 18.6% of distressed companies, totaling 19 firms on January 17, up from 14 on November 15, as consumers continue to swap to online operators that allow buyers to easily compare prices, and millennials shun malls and choose to spend on experiences.

Poor sales results from several bellwether retailers in January prompted investors to start cutting their exposure to retailers with large brick-and-mortar footprints, and fashion retailers with exposure to discretionary spending.

Neiman Marcus' term loan has fallen 8 points since the start of the year to 79-80 on February 14 and women's apparel specialist Ascena Retail's term loan dipped nearly 7 points to 90.5-91.5 at the same time. Sporting goods seller Academy Sports & Outdoors' term loan has lost 10 points this year to 82-84.

Secondary pricing volatility shows no sign of abating for companies under pressure from technology.

Efforts to value technologically challenged companies are playing out in the secondary market as companies with covenant-lite loans are generally unable to increase pricing on existing primary loans or refinance.

"When companies undergo secular change, the loans become more volatile. But there is more opportunity," a loan portfolio manager said.

Would-be buyers and sellers are haggling over secondary market valuations as investors switch into intense active management and consider whether to ride out the volatility or to reduce positions while hedge funds and more aggressive bank loan and high-yield asset managers circle.

"We have been investing selectively in some stressed and distressed areas," said Trey Parker, portfolio manager and head of credit at Highland Capital Management.


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