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U.S. CLOs stopped shopping at Sears a long time ago

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Sears defaulted on a lot of debt when it filed for bankruptcy Monday, including $5.25 billion in term loans and revolving line of credit, but very little of it is in U.S. collateralized loan obligations.

According to Fitch Ratings and Moody’s Investors Service, CLO exposure in minimal; each rate a single CLO with exposure to debt of the former retail giant.

"Sears Holding Corp.’s bankruptcy filing will have no material credit impact on the CLO universe owing to insignificant exposure to the company’s debt,” said Moody’s assistant vice president Kevin Anthony.

“Although highly levered, Sears has only a $750 million senior secured loan facility rated by Moody’s, and just one CLO we rate holds a 0.4% exposure to the loan.”

(S&P on Monday downgraded $5.25 billion in existing term and revolving loans issued by Sears Roebuck Acceptance Corp. and Kmart Corp. that the agency rates.)

The corporate loan exposure is especially minimal compared to the level of Sears’ commercial mortgage debt exposure, amounting to 2.3% of the rated universe of mortgage-backed securities exposed to the Sears/Kmart properties with 239 real-estate loans that are part of 164 Moody’s rated conduit deals.

Retail industry exposure in CLOs has been on the decline in recent years as brick-and-mortar stores have faced challenges from online retail, and became a greater source of stress in CLO portfolio performance. Last year, Fitch reported a growing level of defaults in the retail sector that mirrored the collapse in oil and gas loans in 2014-15.

And while retail loans make up only 5.17% of Fitch-rated deal portfolio sizes — less than half of the 11%-plus exposure to both computers/technology and business services-related corporate borrowers — 15.87% of CLO-held loans rated CCC+ or below were retail industry loans.

But Sears is not among the major culprits, say analysts, mostly due to the length of time that the highly levered, 125-year-old retailer has been struggling.

"The insignificant exposure to Sears is to be expected, as CLOs rarely acquire stressed debt. Sears has been rated Caa1 or lower since January 2014," said Anthony.

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