Moody’s plays down US retail fallout
Debt, over-expansion and rise of online shopping have contributed to problems
American consumers spent at a brisk pace in July, pushing US retail sales to their biggest increase in seven months, according to official figures. Photograph: Don Emmert/AFP/Getty Images
The number of US retailers that have gone bankrupt in 2017 has surpassed last year’s total, but the sector’s woes will have a “limited” impact on the structured finance market where bonds are backed by a pool of underlying loans, according to Moody’s.
Onerous debts and vast over-expansion – coupled with the rise of online shopping – have rattled the sector. This year 24 US retailers have gone bankrupt, against 11 by this time last year out of a 2016 total 18, according to data from S&P Global Market Intelligence.
Some investors and analysts have fretted that the rise in business failures will affect commercial mortgage-backed securities, collateralised loan obligations and real estate investment trusts, given their exposure to retail, especially shopping malls, which have been under particular pressure.
Credit Suisse has estimated that as many as 8,640 stores with 147m sq ft of shopping space will shut this year.
“Retail is clearly going through some stress – if not distress,” said Michael Temple, head of credit research at Pioneer Investments. “The question is whether there will be waves that cascade into other markets and the broader economy.”
But in a report yesterday Moody’s said such concerns were overblown. Despite the deepening challenges, the risks to CMBS, CLOs, Reits and asset-backed securities based on credit card loans were “marginal”, the rating agency concluded.
Such exposure was still “relatively low, and retail distress is concentrated in particular types of retail companies and real estate”, it said.
Moody’s estimated that only 2.1 per cent of the CMBS it graded were exposed to struggling malls; just two out of 22 Reits had a significant exposure to them; and commercial real estate-backed collateralised debt obligations linked to retail was about 6 per cent.
Second-generation CLOs – repackaged securities made up of slices of loans made towards buyouts – also had relatively little exposure to retail, it said.
The impact of the retail industry’s challenges would “largely be limited to private-label and co-branded credit cards”, said Moody’s.
But the trend for store closures would continue for “several years as the retail industry recreate itself”, it added. “Changing consumer behaviour [including ecommerce] has driven a marked increase in brick-and-mortar retailer bankruptcies and store closure announcements.”
However, Moody’s added that exposure “to troubled retail in US structured finance sectors is limited, posing small-to-modest risks for some asset classes”.
Mr Temple agreed that retail challenges would not have a widespread impact, and said many investors were well aware of the problems in the sector.
“It’s fair to question whether there will be a cascading effect,” he said. “But it’s hard to conclude that it will be severe.”
Some analysts and investors said the pain, while slow-moving, would be extensive. “The bad things that have happened to retail have a substantial negative impact on owners of retail real estate,” said Jim Sullivan, president of Green Street’s advisory group. “And the owners of retail real estate are in trouble. We have seen malls closed and we will see more close.”
- (Copyright The Financial Times Limited 2017)