Sears store

The wave of bankruptcies sweeping through retail, and most recently washing out Payless Shoesource, is expected to keep rolling over the next year.

While the default rate of Fitch Ratings’ U.S. retail portfolio had dropped to zero last month, the Chapter 11 bankruptcy filing of Payless, under a debt load of about $665 million, bumped that number up to 1 percent. And the ratings agency said the default rate is likely to hit 9 percent over the next 12 months.

Fitch’s concerns stem from increasing market penetration by discount retailers, including those in the off-price and fast-fashion realms, along with more general “shifts in consumer spending toward services and experiences.”

“All of these factors have created a highly competitive retail environment and accelerated mall traffic declines,” Fitch said. “Retailers have also suffered from the ebb and flow of brand popularity. Negative comparable-store sales and fixed-cost deleverage have led to negative cash flow, tight liquidity and unsustainable capital structures.”

The debt watchdog previously had Payless on its “concern list,” given its highly leveraged debt situation coupled with declining sales. Fitch also pointed to a number of other retailers it sees at “significant risk of default” within a year that collectively hold about $6 billion in debt.

Included on the risk list are Sears Holdings Corp. with roughly $2.5 billion in debt, along with Charming Charlie LLC, Nine West Holdings Inc., Rue21 Inc. and True Religion Apparel Inc., all of which are private companies that do not publicly disclose their debt.

Fitch isn’t the only rating agency with a dim view of retail’s financial future. At the end of February, Moody’s Investors Service said the number of retail debt issuers with a distressed rating was nearing 14 percent of its portfolio, the highest rate since the Great Recession.

Of those retailers Moody’s considers distressed, the agency said companies with weak liquidity are the “most vulnerable” to a debt default.

Retailers Moody’s put in the category of distressed with weak liquidity included Rue21, True Religion and Charming Charlie.

Moody’s also highlighted accessories retailer Claire’s as a distressed retailer at risk of default, and with $26 million in senior subordinated notes coming due on June 1, it could be the next to make a restructuring move. In January, the company pulled plans for an initial public offering.

As for Rue21, its next debt maturity comes in October 2018, but Moody’s cited the “discretionary nature” of Rue21’s product and the economic pressures facing its “lower-income target customer,” namely teenagers, along with its lack of differentiation among a “highly competitive and fragmented ‘fast-fashion’ industry,” as cause for default concern.

Should any of these retailer’s move to restructure their debt in court or decide to close stores, they’ll find themselves with a lot of company.

Companies such as Bebe, Macy’s, Abercrombie & Fitch and even Ralph Lauren Corp. collectively plan to shutter hundreds of stores, while The Limited, The Wet Seal and BCBG Max Azria have opted for bankruptcy.

For More Retail Coverage, See:

Mergers Could Be the New Trend in Luxury

Analysts Have Faith in Lululemon, but Wary of Slowing Growth

Ralph Cuts Deep: Closes Fifth Avenue Polo Flagship

Josh Schulman Leaving Bergdorf Goodman

How Much Faster Can Fashion Get?

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