Rue 21

Expect more leveraged loan defaults throughout the rest of the year — a lot more.

Fitch Ratings Inc. is forecasting a retail loan default rate this year of 9 percent, or the equivalent of about $6 billion of defaults, but that the “fate of Sears Holdings and the resolution of J. Crew Group’s bond exchange could materially alter the projection.”

The ratings agency said Rue 21’s Chapter 11 filing Monday pushed the institutional leveraged loan default rate to 1.7 percent from Fitch Ratings’ 0.9 percent rate over a trailing 12-month period for the U.S. retail sector. Fitch said Tuesday the rate could rise to 2.7 percent on the impending Gymboree filing.

Fitch also said the high-yield retail default rate is expected to “finish 2017 at 9 percent, with more than $4 billion of likely defaults.”

The ratings agency said the rising retail defaults are due to shifts in consumer spending toward services and experiences, as well as increased spending at discounters and at fast-fashion retailers. Further, “negative comparable store sales and fixed-costs deleveraging have led to free-cash-flow deficits, tight liquidity and unsustainable capital structures for some leverage issuers.”

Fitch said it believes “Gymboree is at imminent risk of default.” It had Rue 21 and Gymboree on its “Loans of Concern List.” That list also includes Sears Holdings Corp., Nine West Holdings, True Religion Apparel, Charlotte Russe, Charming Charlie, NYDJ Apparel, Vince and 99 Cents Only Stores.

Separately, credit ratings competitor S&P Global Ratings has lowered its corporate credit rating of footwear and jeanswear firm Nine West Holdings to “CCC-“ from “CCC.” S&P said the outlook “remains negative.” According to S&P, Nine West has hired Lazard Frères & Co. to evaluate its long-term capital structure options. As of Dec. 31, Nine West had about $1.5 billion of funded debt outstanding.

“The downgrade on Nine West reflects our view of an increased likelihood that the company will complete a debt restructuring within the year, wherein investors will receive less value than the original principal obligation,” said Suyun Qu, credit analyst at S&P Global Ratings. He added that the hiring of Lazard is an indication of Nine West’s intent to restructure its debt “given its weak cash-flow generation, very high debt leverage, upcoming maturity of approximately $1 billion of debt in 2019, and the difficult retail environment for brick-and-mortar stores, which are its major customers.”

Qu also said S&P could lower its ratings on the company if a distressed debt exchange or restructuring were announced, or if the company is unable to meet its principal and/or interest payments. In the alternative, he said the ratings group could revise the outlook to stable or raise ratings if there is an unexpected turnaround in operations or an unlikely cash equity infusion by its owner.

As for the Rue 21 bankruptcy, court documents said the company’s closure of almost 400 stores would result in liquidation sales that are expected to net $37 million in proceeds for the debtors’ estate. In the filing by Stephen L. Coulombe from Berkeley Research Group, the consultancy hired by Rue 21, he said while there are no plans to close additional stores, that could change depending on whether certain stores meet performance metrics or whether the retailer can negotiate rent concessions with certain landlords.

Rue 21 has already begun exiting almost 400 of its underperforming stores, bringing the count down to about 800 from 1,179. The total cost for store rents was $118 million in 2016, and was expected to rise to $119 million for 2017 before the announced store closings.

A court filing by Jonathan Brownstein, a director in the North American Debt Advisory and Restructuring Group at Rothschild Inc., Rue 21’s financial adviser, said the company has a deal with lenders for $125 million in debtor-in-possession financing, as well as a term loan for up to $50 million. The company plans to exit as a much smaller going-concern entity.

Rue 21, owned by Apax Partners, filed its petition shortly before midnight Monday. In a declaration by Todd M. Lenhart, the specialty chain’s acting chief financial officer and senior vice president of accounting said the company saw sales grow from $296.9 million in fiscal-year 2007 to $901.9 million in fiscal-year 2012. By 2015, gross sales totaled $1.13 billion, with adjusted earnings before interest, taxes, depreciation and amortization of $105 million. While sales inches up to $1.137 billion in 2016, adjusted EBITDA fell by almost half to $54 million, according to Lenhart.

According to Lenhart, most of Rue 21’s customers on average earn less than $35,000 in gross annual income. The retailer has about 15,800 employees, composed of 3,500 full-time staffers and 12,300 part-time employees.

While Rue 21’s chief executive officer Melanie Cox said the outcome of the process “will be a stronger and more sustainable Rue 21,” it isn’t entirely clear what really is the future for Rue 21.

According to Checkout Tracking data from The NPD Group, shoppers who purchased from Rue 21 spent only about 3.3 percent of their apparel wallet at the retailer. That compares with the share of wallet they gave to Wal-Mart Stores at 17 percent, which was about five times greater. Other major department stores such as Kohl’s Department Stores and Target Corp. also received higher percentages of share of apparel spend, at 8 percent and 7 percent, respectively. Teen competitor Aéropostale Inc. garnered a 6 percent share of wallet, while buyers at Forever 21 spent about 5 percent of their apparel wallet at that chain.

NPD also said Rue 21 buyers were more loyal to Rue 21 than to TJ Maxx, which received about 3 percent of their spend; Ross Dress for Less, also at 3 percent; Macy’s Inc., which received 2.5 percent of their spend, and Old Navy, also at 2.5 percent.

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