LSTA Warns on CLO Exposure to Distressed Retailers

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Retail exposure might represent the largest distressed sector exposure for CLOs – even more so than energy, the Loan Syndications and Trading Association warned Friday.

The trade group's weely membership newsletter, published Friday, pointed to recent research from investment banks speculating on the likely impact of troubled apparel chains such as Sears, JCPenney, Neiman Marcus and Macy's.

It cited a report from Nomura noting that while just 6.4% of loans in the Standard & Poor’s/LSTA Leveraged Loan Index are priced below 90 cents on the dollar, “20% of retail loans in CLOs are.”

Morgan Stanley research stated that department stores account for only 6% of CLO retail exposures, but 73% of the segment is priced below 90 - with Neiman Marcus' debt alone priced near 80 cents on the dollar.

The luxury chain holds about $5 billion in debt, as private equity sponsors Ares Capital Management and the Canada Pension Plan Investment Board (CPPIB) explore a sale. 

“Moreover, if one takes a broader definition of ‘distressed’, the news is worse,” the newsletter stated. Citing Morgan Stanley research, the LSTA reported that 24% of loans in retail are considered ‘distressed’ and account a fifth of distressed collateral in U.S. post-crisis CLOs.

The Morgan Stanley report defined distressed CLO collateral as loans rated at CCC+ or below, or their loans rated ‘B-’/B3 are trading at price levels of loans rated ‘CCC+’/‘Caa1’

“By these calculations, retail-related credits account for more than 20% of the distressed collateral in U.S. 2.0 CLOs. Bottom line: This is the largest single distressed sector in CLOs, including oil & gas,” the newsletter stated.

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