Financial sources ranging from credit analysts to bankers and factors said they have been keeping close tabs on the two nameplates. Professionals who keep a watchful eye on liquidations and real estate closures also have echoed the sentiment about the two retailers.
Gymboree was noted by Fitch Ratings Agency last month as a retailer that could file for bankruptcy court protection due to a significant risk of default over the next 12 months. Rue 21 was also on that list. And of course so was Sears Holding Corp. But while no one expects a Sears filing to be imminent, that’s not the case with Gymboree and Rue 21.
Sources said this week that the situation has gotten more critical for the children’s and teen retailers. Gymboree has an interest payment with a due date of June 1 for notes due in 2018, and the company said in March that it was getting short on cash. Financial sources this week said the “prognosis” hasn’t changed, given its ongoing cash flow issues.
Rue 21 last month said it plans to close about 400 of its 1,200 stores. It also received a one-week extension on an interest payment that was due last month. The extension ends on Monday. Adding to the concern of an imminent filing was the downgrading of the retailer’s corporate credit rating on Wednesday to “D” from a “CC” by Standard & Poor’s, another ratings agency.
Explaining the decision, S&P credit analyst Mathew Christy said, “The downgrade reflects our belief that Rue 21 will not meet its financial obligations following the conclusion of the forbearance agreement with its lenders.” Christy also said that the default is expected to be a general default. “Rue 21 has a $538.5 million first-lien term loan — $520 million outstanding — and a $250 million unsecured [note, of which $145 million is outstanding], as well as significant outstanding debt under its asset-backed revolving credit facility,” Christy added.
S&P’s Christy said of the upcoming expiration of the one-week extension: “We expect the company will enter into a restructuring in the near future.”
Both retailers were taken private by private equity firms, which added a load of debt on their balance sheets from the leveraged buyouts.
Based in San Francisco, Gymboree was acquired by Bain Capital in 2010 in a deal estimated at $1.8 billion. Apax Partners acquired Rue 21 in 2013 for $1.1 billion.
Should Rue 21 file for a bankruptcy court petition next week, it would be the second filing for the teen chain. The Pittsburgh, Pa.-based firm’s first filing was in 2002 when it was operating under the name Pennsylvania Fashions Inc. The chain emerged the following year under a new name, and then went public in 2009.
A bankruptcy court petition would add to the string of retail filings so far this year. The retailers that have filed in 2017 include Gordmans; Gander Mountain; The Limited; American Apparel, and BCBG Max Azria.
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