Fitch: Is Retail the Next Shoe to Drop for U. S. CLOs?
Retail is the third largest sector represented in Fitch's CLO database, representing approximately 7.5% of assets on average. The presence of loans from challenged retailers like J. Crew and Tailored Brands (Men's Wearhouse) remains a concern, although not one that will significantly impact CLO performance. The retail outlook for brick and mortar stores is dimmer than the outlook for overall consumer retail spending for two reasons: a shift in consumer spending to e-commerce models vs. in-store sales and to services and experiences vs. products.
"Given the challenging backdrop, J. Crew and Tailored Brands are among the retailers either muddling along or donating market share," says David Silverman, Senior Director, U. S. Corporates.
Retail has joined both energy and metals/mining as sectors that CLO investors are most concerned over. Despite all the negative headlines in recent months, energy and metals/mining collectively only account for just over 4% of CLO exposure. While retail exposure averages 7.5%, individual CLO portfolio exposures range between 2% and 15%. Retail loans also encompass the second largest amount of Fitch's Loans of Concern (behind energy).
Despite growing risks in these sectors, the risk of negative rating migration remains limited according to Managing Director Kevin Kendra. Evidence of this was in Fitch's most recent CLO portfolio review, in which it affirmed all ratings with a Stable Outlook.