Fitch Ratings believes the U.S. retail industry continues to be a moderate risk for leveraged buyout (LBO) transactions.

The retail industry has several characteristics that make it attractive for private equity and other financial sponsors. These include relatively stable cash flows that are not subject to cyclical swings seen in other industries and real estate which can provide an acquirer with an additional source of liquidity or a backstop if a financial turnaround is unsuccessful.

Fitch notes, however, that successfully merchandising a store and achieving an acceptable return can be challenging. Furthermore, insider ownership and bond covenants can be hurdles to completing a transaction.

'Continued LBO activity or the speculation about such activity puts bondholders at risk for adverse price movements as well as increased defaults,' said Karen Ghaffari, Senior Director, Fitch Ratings.

Across the various retail industry sectors, Fitch views the specialty retail sector as having the highest risk for LBO activity. This is particularly true of specialty retailers that have low levels of debt and small market capitalizations, which make an LBO transaction more achievable. In addition, there may be opportunities for operational improvement through cost cutting and supply chain efficiencies that would make these transactions financially attractive.