Leveraged loan default rates in the retail sector have soared torecord levels amid the coronavirus outbreak  — and theywill likely continue climbing.

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According to a report from S&P Global MarketIntelligence, the US leveraged loan default rate in retail rose toa record high of 10.34%, pushed along by J.Crew Group Inc. andNeiman Marcus, two companies that entered Chapter 11bankruptcy this month.

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Over the last 12 months, five retailers have defaulted acrossseven term loan facilities, totaling $4.9 billion, or 16% of alldefault volume across all sectors, said the S&P report.

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Retail loan defaults are expected to keep climbing"substantially" as brick-and-mortar stores,  already facedwith online competition and declining foot traffic, "have beendealt a brutal blow by the pandemic," the S&P report said,adding that prolonged store closures and declining economicactivity have prompted even previously solvent entities to lock inliquidity.

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Looking at potential future defaults, retail has thesecond-highest share of U.S. leveraged loans (at the sector level)rated CCC and CC, at 31%, per the S&P/LSTA Index, the S&Preport said.

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In an earlier report by S&P Global Ratings, an analyst citedeight Index issuers rated CCC+ or lower, implying a 1-in-2 chanceof defaulting. These include Academy Ltd., Ascena Retail GroupInc., Belk Department Stores LP, J. C. Penney Company Inc., Jo-AnnStores Holdings Inc., Party City, Petco and Jill AcquisitionLLC.

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A default by these triple-C rated retailers "would push theretail default rate to a whopping 31.3%," said the report.

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Overall, the default rate of the broader, $1.2 trillionleveraged loan asset class remains below historical averages, atjust 2.53%, according to the May 13 report, citing again theS&P/LSTA Loan Index. Retail makes up just 3.6% of all Indexloans.

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Christine Simmons

Christine Simmons writes about the New York legal community and the business of law. Email her at [email protected] and find her on Twitter @chlsimmons