Fitch: Idiosyncratic Factors Threaten European Leveraged Retail, Lodging Credits
OREANDA-NEWS. Fitch Ratings says that challenges including increased competition, the shift to online, and constrained disposable incomes in the eurozone will pose the greatest threats for leveraged credits in retail, lodging and restaurants sectors. Moreover, more onerous lease expenses usually translate into weaker financial flexibility for European retailers compared with their US counterparts. These are the conclusions of the first edition of Fitch's 'European Non-Food Retail, Lodging, Restaurants: Speculative-Grade Handbook'. At present Fitch covers 27 non-food retail credits in the leveraged loan/high-yield sector, and 19 in lodging/restaurants.
Retailers focusing on the value-end of the market are faring better than those with an undifferentiated product offer and/or an unclear pricing or service proposition, as consumers remain discriminating in their spending habits post crisis. Restaurants and hotels currently benefit from positive consumption and demographic trends, as well as an increase in spending on "experiences". The operating leverage in these businesses means that highly leveraged expansion plans could fail if economic conditions were to worsen.
We see digital as both a threat and a source of opportunities for retail, hotels, even restaurants. In particular small operators face increasing and disruptive competition from pure online retailers, hotel booking systems or digital ordering (Uber-like) for restaurants. The inability of such small players, often leveraged, to adapt to the new reality could seriously impair their business models as they may fail to grab elusive customers.
The combination of business model weaknesses and exposure to cyclical end demand translate into a high inherent business risk profile. In addition, within our coverage of credit opinions for leveraged loans in these sectors, high leverage and volatile or low cash-flow conversion result in an average Issuer Default Credit Opinion (IDCO) of b-*/b*.
Historically, these sectors have seen defaults. Although the significant fragmentation of these sectors in Europe leaves some room to perform, we expect a high degree of credit stress over the next two years for credits positioned in the low end of the rating spectrum as reflected in the relatively large proportion of "at-risk" borrowers with about 24% of all names rated 'b-*'/Negative Outlook or below.
This is the first of a series of reports in Europe which highlights common elements, including Fitch's approach to rating the sectors under review, a sector snapshot including market and macroeconomic trends, as well as leveraged statistics related to primary activity and performance analytics.