Bill derrough moelis headshot

Real change has come to retail — and really fast. 

The outbreak of the coronavirus and the attendant shutdowns that ripped across the globe are simply too much for most businesses to endure. 

Both supply and demand have collapsed at once — an unprecedented situation that has companies that were in expansion mode just a month ago hunkering down and trying to make sure they have enough cash to pull through. 

In the spotlight now is Neiman Marcus Group, which has been struggling for years with a mountain of debt following two private equity buyouts and is now considering its options and having early talks with its term loan lenders about lining up financing for a possible bankruptcy.

But Neiman’s is just on the vanguard of companies that are being forced to look at their alternatives and make some tough decisions.

It’s an environment that’s making for a very busy time for specialists who help companies restructure their debt, including Moelis & Co., which has advised on nearly 500 restructurings over more than a decade, including fashion and apparel retail businesses with more than $100 billion in debt collectively.

“COVID-19 has caused an unprecedented disruption to retail across the country and worldwide,” said Bill Derrough, global co-head of restructuring and recapitalization. “Many retailers were operating in a challenging environment before COVID-19, and now find themselves facing an increasingly uphill battle for liquidity. Finding alternative financing will be critical as options, like debt markets, are now closed and near-term covenant defaults may make it impossible to access new capital. 

“The future of the retail industry will be defined by the analysis, advice and access to capital retailers receive over the next six months,” Derrough said. “Private funds are stepping in to provide financing and it is imperative that management teams have the right advisory partner to help them access alternative liquidity solutions.”

Companies are laying off workers and hitting pause on expensive projects and more, but the restructuring specialist emphasized they simply can’t cut expenses fast enough to offset the revenue decline.  

Most big U.S. apparel retailers have shut their doors and the chains that are open, such as Target, are doing more business in food than fashion. The mass retailer said its comparable sales in apparel and accessories are down more than 20 percent so far this month.

And Target is one of the lucky ones, being well capitalized to start and still bringing in sales dollars, even if it’s on low-margin basics. 

Moelis is working with companies now to prioritize payments to satisfy employees, suppliers and investors and going week by week while also planning for the months ahead to see if the sales declines will breach debt covenants. 

The restructuring specialist also pointed to the specific challenges facing apparel retailers, including:

• Stocks of seasonal and trend-based looks won’t be salable in six months even if the stores are reopened. 

• Long lead times to make and ship goods will impact future plans and cause capital to fall short in the meantime.

• The asset-based financing many retailers use to find working capital is tied to the liquidation value of inventory. “If retailers/lenders cannot take physical inventory, value it effectively or liquidate it, they will need to find other sources of capital,” Moelis said.

Restructuring is its own specialty in the financial world. And in normal times, it’s the relatively few fashion companies in dire straits that are engaged in war room strategy sessions on how debt can be reworked and where cash can be found. 

But in a world wracked by COVID-19, everybody has a war room — and more will need war room advisers. 

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