Fitch Ratings analyzed 30 retail bankruptcies, concluding that liquidation was more prevalent in the retail sector, and identifying seven U.S. retailers with significant default risk within the next 12 to 24 months.
The at-risk retailers identified by Fitch include Sears Holdings Corp., Claire’s Stores, True Religion Apparel Inc., 99 Cents Only Stores, Nebraska Book Co., Nine West Holdings Inc. and Rue21 Inc.
The report released Wednesday, its 10th edition, is entitled “Retail Bankruptcy Enterprise Value and Creditor Recoveries.”
In its analysis, the 30 retail bankruptcies collectively had $10.5 billion of debt. Secular challenges include the rise of e-commerce and discount retailers, declining mall traffic and consumer spending shifts toward services and experiences. Retailers also suffer from the “ebb and flow of brand popularity,” noted the report, which was authored by credit analysts Sharon Bonelli and David Silverman, who work in Fitch’s leveraged finance division.
The report also noted that retailers can find themselves on a slippery slope to bankruptcy as negative comparable-store sales and fixed deleveraging costs lead to negative cash flow, tight liquidity and unsustainable capital structures.
The report also found that liquidations resulted in 15 of the 30 firms analyzed, mostly because competitors offering the same merchandise at better prices or brand degradation are issues that limit a retailer’s value as a going concern.
“As a result, many retailers move into the bankruptcy process without a real reason to exist and ultimately end up in liquidation more often than bankrupt companies in other sectors,” Bonelli said.
While it’s no surprise that secured debt recoveries among first-lien lenders typically make full recoveries, second lien recoveries were more varied and unsecured debt claims recovered poorly, the Fitch report concluded.
Some of the case studies noted in the report include American Apparel Inc.; BSCV Inc. (Boscov’s); Coldwater Creek Inc.; Eddie Bauer Holdings Inc.; Finlay Enterprises Inc.; Goody’s LLC; Gottschalks Inc.; Loehmann’s Holdings Inc.; Movie Gallery Inc.; Quiksilver Inc.; Syms Corp., Filene’s Basement LLC; Value City Holdings Inc., and The Wet Seal Inc. It also noted a few where the administrative component of the debtors’ estate are still in progress, such as Aéropostale Inc., Pacific Sunwear of California Inc. and The Sports Authority.
As for the retailers on Fitch’s watch list, it cited Claire’s, Sears, Nine West, 99 Cents, Rue21 and Nebraska Book Co. as having issues connected with high-yield bonds, while Sears, Nine West, 99 Cents, Rue21 and True Religion were cited for concerns over their institutional term loans.
Fitch said the seven retailers it noted as high risk of default are “challenged by declining mall traffic, competition from online and other types of retailers, and/or a lack of a compelling product line. Highly leverage capital structures may become unsustainable in the face of these challenges.”