The retail sector has been particularly hard hit by the temporary closing of many businesses due to COVID-19 and the inability of some businesses to reopen as lockdown measures start to be lifted. At the onset of the pandemic, retail loans tumbled by 25 points on average in the secondary market, outpacing the 20 points drop in the broader market.

Since then, retail loans have rebounded by 16 points, topping the 13 points gain in the broader market, but continue to trade at a significant discount to the broader market. The average bid on retail loans is now at 86.50, nearly four points below the overall market average of 90.14.

Retail loans are trading at a particularly wide distribution in the secondary market, with a hefty 29% remaining in the sub-80 area, compared to only 11% in the broader market. At the upper-end, 61% of retail loan debt is bid above 90 versus 78% in the overall market.

In addition to liquidity issues, several companies have faced an additional layer of complexity including negotiations with landlords on rent payments. Some landlords have been supportive, offering rent-free periods, interest-free rent deferrals, service charges reduction, or agreeing to turnover-based rent models. But others have locked horns with their tenants, resulting in disputes and decisions to permanently shut some stores – for instance, UK department store operator Debenhams failed to reopen seven of its stores due to a lack of agreement with a landlord.

Among various initiatives, two German retail and real estate trade associations, the Handelsverband Deutschland and the Zentraler Immobilien Ausschuss announced in early June a code of conduct for lease concession negotiations. While the number of rent reductions will be case-specific, a haircut of 50% while businesses are closed serves as a guideline, with three months of further, but lower, rent reductions after closures cease. Meanwhile, the English High Court granted an injunction to restrain the presentation of a winding-up petition against an unnamed high street retailer by its landlord on the basis of anticipated legislation - which eventually came into force at the end of June - banning the presentation of petitions from 27 April until the end of June, where the court is satisfied coronavirus had a financial effect on the company, in a bid to protect tenants.

Colm (C.J.) Doherty Global Head of Primary Market Analysis Debtwire

Colm Doherty is Debtwire’s Global Head of Primary Market Analysis. He is responsible for leading the production of primary market analysis and reports focused on the leveraged loan and high yield bond markets. Prior to joining Debtwire, Colm was Director of Analysis at Thomson Reuters LPC covering leveraged loans, CLOs and high yield bonds.

Colm has a B.A. in Economics & Legal Science from National University of Ireland Galway and an MSc. in Accounting & Finance from Ulster University.