There is good news and bad news for the U.S. retail industry when it comes to defaults and bankruptcies.
The default rate in retail and apparel speculative debt will fall to 5.3% this year, down from the record high of 20% last year, according to a new research report from Moody’s Investors Services. Retailers with high leverage, however, could still find themselves unable to make their debt payments even as the country emerges from the pandemic, warned the credit watchdog.
“With 20% of Moody’s-rated U.S. retailers defaulting last year, the pandemic exacted a heavy toll on the industry,” said Raya Sokolyanska, a Moody’s VP and senior analyst. “But we believe the sector has a brighter horizon in 2021, thanks to big liquidity boosts from capital raises, broad balance sheet improvement and macroeconomic growth.”
At the same time, Sokolyanska added, the retail default rate remains historically high.
“Despite significant improvement, our 2021 default forecast remains well above previous economic recoveries,” she said.
According to Moody’s, risk remains concentrated in apparel retailers and department stores, both of which continue to be hurt by long-term challenges and pandemic lifestyle changes. In 2020, apparel stores and department stores comprised 53% of sector defaulters and an even greater 63% from 2017 through 2019.
“Department stores and apparel are still confronting intense long-term pressures and highly levered retailers remain vulnerable, which puts downward pressure on our forecast,” Sokolyanska said.
Bankruptcies represented the majority of defaults in 2020, a reversal from 2019 when 70% of defaults were distressed exchanges.