Distressed retail up; Rite Aid extends gains; Michaels rises; loan defaults outpace junk

By Cristal Cody

Tupelo, Miss., July 21 – Distressed paper saw some gains over Friday’s session with retail paper finding some footing.

Rite Aid Corp.’s 8% senior secured notes due 2026 (Caa3/CCC-/B) extended gains a second day with the notes going into the weekend 4½ points higher on the week.

The issue was more than 1 point better on Friday.

Michaels Cos, Inc.’s 7 7/8% senior notes due 2029 (Caa2/CCC) also improved early in the session and held on to a ¾ point gain by the close.

The retail space remains under pressure, though.

“U.S. retail sales continue to grow at a modest pace that is barely keeping up with inflation,” according to a Moody’s Investors Service report on Thursday.

Market tone was mixed on Friday.

The S&P 500 index edged up 0.03%.

The iShares iBoxx High Yield Corporate Bond ETF added 19 cents, or 0.25%, to $75.37.

The CBOE Volatility index retreated 2.79% to 13.60 by the close.

In other distressed market activity, leveraged loans are expected to outpace the junk space when it comes to defaults this year, according to a BlackRock Investment Management global credit report on Thursday.

The trailing 12-month, issuer-weighted default rate for leveraged loans was 4.03% through the end of June and 2.7% for high-yield bonds, BlackRock said, noting the “unusual” pattern that is expected to “persist in response to the higher cost of capital environment.”

BlackRock said its year-end 2023 forecast for the trailing 12-month, issuer weighted default rate for high-yield bonds and leveraged loans combined remains at 5% to 6%, up from a combined HY/loan default rate of 3.8% as of June.

“The 133 bp differential between the two asset classes is the largest since 1996,” according to the note.

Rite Aid stronger on week

Rite Aid’s 8% senior secured notes due 2026 (Caa3/CCC-/B) picked up 1¼ points over the day to a quote of 47½ bid, a market source said.

On Thursday, the notes improved 1½ points to 46½ bid.

The issue was up about 4½ points from the same day a week ago.

Rite Aid’s credit default swap spreads widened more than 450 basis points this past week.

The Camp Hill, Pa.-based drugstore chain’s stock (NYSE: RAD) closed Friday 1 cent better at $1.59.

Michaels improves

Michaels’ 7 7/8% senior notes due 2029 (Caa2/CCC) went out ¾ point higher at 69½ bid on Friday, a source said.

The notes were seen at midday trading up ¾ point from Thursday.

The Irving, Tex.-based arts and crafts retailer was taken private in 2021 by funds managed by Apollo Global Management, Inc. affiliates.

Distressed returns up

S&P U.S. High Yield Corporate Distressed Bond index one-day total returns improved to 0.09% on Thursday from minus 0.03% on Wednesday, 0.03% on Tuesday and minus 0.51% on Monday.

Month-to-date total returns rose to 1.69% over Thursday’s session. Returns so far for July totaled 1.6% on Wednesday, 1.64% on Tuesday and 1.6% at on Monday.

Year-to-date distressed total returns rose to 13.52% from 13.42% on Wednesday, 13.46% on Tuesday and 13.42% at the start of the week.

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