While there was no surprise when Gymboree on Sunday finally filed its Chapter 11 petition for bankruptcy court protection, Fitch Ratings on Monday said the company is expected to emerge as a smaller firm.
The ratings agency based that conclusion on Gymboree’s continuing support of its financial sponsor, Bain Capital. The children’s retailer has been operating with significant leverage since Bain’s 2010 leveraged buyout transaction for $1.8 billion. The company has had an unsustainable capital structure since the buyout because of negative same-store sales trends and decreasing cash flow.
According to Fitch, trading prices on the retailer’s $171 million of senior unsecured notes — bid at 6 cents — due December 2018 and $761 million secured term loan — bid at 45 cents — indicated weak recovery prospects.
Gymboree said it has signed a restructuring support agreement with a majority of its term loan lenders — that support should allow the company to restructure its balance sheet and reduce debt by more than $900 million.
Fitch said Gymboree’s filing has pushed the institutional leveraged loan default rate to 2.7 percent from 1.7 percent. It said if Sears Holdings Corp. were to file a Chapter 11 petition this year, that would push the rate up to 4 percent.
Fitch is forecasting the retail loan default rate to hit 9 percent, or the equivalent of about $6 billion of defaults. The ratings firm is expecting retail defaults because of increased off-price and fast-fashion apparel purchases, as well as the rise of online shopping and a consumer shift from fewer apparel purchases and an increase in spending on services and experiences.
Other retailers and firms on its watch list include 99 Cent Stores; J. Crew Group Inc. (which on Monday revealed a proposal to ease its debt pressure); True Religion Apparel Inc.; Charlotte Russe Inc.; Charming Charlie; NYDJ Apparel, and Vince.
As of April 29, the bankrupt retailer operated 1,281 stores. The majority — at 582 doors — are operated under the Gymboree nameplate. The balance of the stores are outlets and doors operating under the Janie and Jack and Crazy 8 nameplates.
A bankruptcy court for the Eastern District of Virginia has approved a request for the administration of the bankruptcy and affiliated Gymboree debtors.