A more cautious consumer and heavy debt loads are putting the squeeze on more retailers. 

Moody’s Investors Service forecast debt defaults would “speed up,” with the U.S. retail and apparel speculative-grade default rate increasing to eight.6 percent for 2023 from 6 percent currently. 

“In a pointy reversal because the benign conditions of 2021, which lasted through September 2022, defaults have since spiked, driven by a dearth of debt financing, high rates of interest, surging costs, declining discretionary goods spending and provide chain challenges,” the credit watchdog said in a latest evaluation.

“Strong balance sheets are actually much more essential,” Moody’s said.

The sector registered seven defaults since September, as opposed to simply one throughout the prior yr; amongst them were the Bed, Bath & Beyond bankruptcy and liquidation and Rite Aid Corp.’s distressed exchange.   

“Despite our stable outlook for the retail sector, conditions remain difficult,” Moody’s said. “While retailers should profit from normalized freight rates, declining product costs and fewer steep promotions within the second half of 2023, consumer demand for discretionary goods is under pressure.

“Higher labor expense can also be hitting profitability despite decelerating overall inflation,” Moody’s said. “While we don’t expect a return to the pandemic-period 22.5 percent peak in speculative-grade defaults, the pressures are high enough to push up distress levels closer to the 2017-2019 retail default cycle,” when the default rate stood at 13.6 percent.

The rating agency pointed to 10 retailers which might be rated B3 and below — subject to not less than “high credit risk” within the agency’s scale — and have a complete of $4.9 billion in debt coming due between 2023 and 2024. 

Topping this list were Belk, which is rated Caa3 and has $1.3 billion coming due, and the Qurate Retail Inc.-affiliated Liberty Interactive, which is rated B3 and has $1.1 billion coming due. 

In good times, even firms with weaker credit scores can refinance; they simply should pay more and limit their financial flexibility. However the financing climate has shifted rapidly over the past yr because the Federal Reserve has ratcheted up the benchmark rate of interest by 5 percent to fight inflation.

“Weaker, highly leveraged firms proceed to have a tricky time accessing capital in a market where investors remain risk averse,” Moody’s said. “This will probably be increasingly problematic for firms on the lower end of the rating scale. Out of the 127 retail & apparel firms, we currently rate 16 at Caa1 and below — a level that indicates a high likelihood of default.

“About 60 percent of U.S. retail and apparel firms rated B2 and below have only floating-rate debt and are due to this fact fully exposed to rising rates,” Moody’s added. “Our evaluation also indicates that almost all don’t have any rate of interest protections in place. Generally, the smaller the corporate, the more likely it’s to depend on floating-rate debt, making it more vulnerable to increased interest costs.”