US retail sector will see $7bn of defaults in 2018: Fitch
US retailers that fought through a stressful 2017 will face a gloomy 2018 after the sector was given a 10% default forecast -- which equates to $7bn -- by Fitch Ratings. The downbeat outlook has been blamed on the rise of online shopping and the dominance of Amazon. Fitch has compiled lists of primary and secondary loans of concern, including those of iHeartCommunications and J Crew Group. In September, the trailing 12-month retail default rate rose to 7.3% following the bankruptcy of Toys 'R' Us, compared with about 5% in the preceding two months.
The stress in the retail sector that has triggered a string of bankruptcies this year is unlikely to get much better in 2018.

The sector is expected to again produce the most defaults at up to $7 billion, resulting in a 10% default rate, Fitch Ratings said Thursday.

The September trailing 12-month retail default rate stood at 7.3% after Toys ‘R’ Us Inc.’s bankruptcy filing, up from just above 5% in July and August. The retail sector accounts for 30% of the defaults that have taken place in 2017 to date, with six issuers defaulting on debt totaling $5 billion.

The retail sector has been hit by a combination of factors, including competition from Amazon.com Inc. AMZN, +1.46% , and a greater shift toward online shopping that has forced many to invest in technology at a time when sales are soft.

Consumer behavior has changed as the millennial generation comes of age, and retailers are now competing for dollars with smartphones, apps and electronics, as well as experiences such as travel and entertainment. Mall traffic has dwindled in many places, pressuring the anchor tenants that relied on them for sales.

The overall institutional leveraged loan default rate is expected to end 2018 at 2.5%, said Fitch, equal to about $27 billion of debt.

“Default volume will continue to be concentrated in retail and a couple of energy companies in 2018,” analysts led by Eric Rosenthal wrote in a note. “Excluding these two sectors, the 2018 default rate forecast is 1.5%. “

In case you missed it: J.C. Penney, Gymboree and J. Crew at risk -- and it’s not all Amazon’s fault

The average rate during a non-recessionary period is 1.7%.

Read also:Amazon isn’t the only reason Toys ‘R’ Us filed for bankruptcy

Fitch is now keeping a list of secondary loans of concern, identifying likely default candidates. The list includes Neiman Marcus Group Inc., J Crew Group Inc., Talbots Inc., Lands’ End Inc. and Cole Haan.

Other issuers that Fitch is monitoring for now include PetSmart Inc., Belk Inc., Ann Taylor parent Ascena Retail Group Inc. US:ASNA , Tailored Brands Inc. US:TLRD and J.Jill Group Inc. JILL, -0.80%

Don’t miss:J. Jill downgraded twice, shares sink by half after profit warning

Also:Sears is still kicking the can down the road with asset sales and debt measures

Here's how to pick retail companies that will survive the meltdown

Fitch’s primary loans of concern list is led by iHeartCommunications Inc. IHRT, which is battling creditors as it struggles to restructure a $15.5 billion debt load taken on as part of the 2006 leveraged buyout by Thomas H. Lee and Bain Capital.

Read: iHeartRadio parent may be shaping up for a bruising fight with its lenders

That list includes troubled department-store chain Sears Holdings Corp. US:SHLD, Nine West Holdings Inc., 99 Cents Only Stores LLC, NYDJ Apparel LLC and Vince LLC. VNCE, +3.36%