Retailer woes pose 'marginal' risk to asset-backeds, says Moody's

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A rash of retailer bankruptcies and store closures poses only “marginal” risk to U.S. structured finance markets, according to Moody’s Investors Service.

While brick-and-mortar retailers are likely to remain under pressure from e-commerce and changing consumer behavior for some time, most asset classes have only limited exposure.

Even in the most exposed asset classes, commercial mortgage bonds and collateralized loan obligations, the risks are limited because exposure is relatively low, and retail distress is concentrated in particular types of retail companies and real estate.

Although loans on retail properties account for nearly a third of the $345 billion of collateral for CMBS that Moody's rates, malls, denoted as “troubled malls/malls of concern,” account for only about 2.1% ($7.3 billion) of the total, the report states. . For perspective, the Moody’s rated universe accounts for a little over 11% of all U.S. retail properties, and just 241 of the 1,220 US malls.

“Trophy/dominant” malls, those best positioned to survive or thrive in the long-term despite deleterious impacts from changes in the retail sector, represent a significantly higher share of CMBS than malls of concern. These high-performing malls account for about 4.7% of the rated universe, more than double that of malls of concern.

Malls that Moody's categorized as trophy/dominant have some "healthy combination" of strong competitive market positions, sales per square foot, tenancy, demographics, net operating income and experienced, well-capitalized sponsorship.

Although retail is the fourth largest industry exposure among US CLO obligors, it still accounts for just a "modest" portion of CLO collateral. Furthermore, the average credit quality of CLO-held retailer loans is generally in line with that of all CLO collateral, though some transactions face greater risks.

Moody's thinks that the limited exposure will lessen the impact of the industry's stress on the CLO sector. "For instance, at the end of the second quarter, retail and apparel issuers represent only about 6.7% of the collateral for CLOs issued since the 2008 financial crisis."

Nevertheless, exposure to distressed retail and apparel issuers (Caa1 or lower) has increased in recent years, mirroring
distress in the greater retail universe. Although rising distressed exposures still account for a small portion of CLO collateral, several deals have outsized exposures to distressed retail.

Risks to credit card ABS from the retail sector dislocation exist mainly in three trusts with significant exposure to private-label and co-branded credit cards tied to the industry. "Because pool performance worsens when consumers' credit cards fail to maintain ongoing utility, private-label charge-off rates will rise somewhat as store closures result in cardholders losing access to geographically convenient locations," the report states. Co-branded cards will see similar effects, though to a smaller degree."

Meanwhile, a separate negative effect of legacy retailers experiencing sales challenges will be that the companies will likely push for looser underwriting by their bank partners on their private-label and co-branded cards.

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