2019's retail bankruptcies.

Expect more bankruptcies in 2019, particularly on the retail front.

One value investor, who kept a close watch on holiday sales, said conversations with retailers indicate there’s likely more trouble ahead. And he said the trouble cuts across the board, from smaller retailers to larger ones and includes names that would either be first-time filers to those that have filed before, leading them into the so-called Chapter 22 for the second-timers.

Another investor, one on the distressed side who has experience in retail investments, similarly concluded: “I see a lot of 22’s in fashion. In the past month I have been contacted by over a dozen retailers looking for investors. These are [sizable] retailers who are going to file again or for the first time. They were holding off, grabbing what they can from holiday sales. [This year] will be busier than last year.”

While many retailers have said online sales have risen and helped to offset the sales decline at brick-and-mortar stores, the distressed investor emphasized that the missing ingredient for most retailers is the drop in impulse buys when consumers walk the aisles. He explained that shopping online isn’t as profitable as in-store sales because consumers tend to target specific items or categories instead of browsing the site. The addition of promotions and free shipping further pressures the profitability of those sales. This investor declined to name names, due to non-disclosure agreements that he’s signed, but he did disclose that he’s inked about 10 of these NDAs.

A report in December from credit ratings agency Fitch Ratings Inc. has nine retailers on its Top Loans of Concern and Top Bonds of Concern lists. Luxury retailer Neiman Marcus Group is the largest name by debt amount, with $2.8 billion of institutional term loans and $1.8 billion of high-yield bonds outstanding. Other retailers on the Top Loans of Concern list include footwear firm Toms Shoes LLC, at $299 million; brand management company Iconix Brand Group Inc., $170.9 million; jeans brand NYDJ Apparel LLC, $100 million, and women’s specialty chain Charlotte Russe Inc., $90 million.

According to the Fitch report, liquidation is often the outcome for bankrupt U.S. retailers. A Fitch analysis of 46 retailers that have filed for bankruptcy since 2003 shows that nearly half, at 21 retail filings, were resolved only via liquidation.

That reflects the end game for many retailers that filed in 2017. But last year could turn out to be an exception. There were fewer fashion and apparel bankruptcies in 2018. One notable retailer that filed, David’s Bridal, is slated to exit bankruptcy proceedings later this month. And Sears Holdings Corp., which filed its Chapter 11 on Oct. 15, is still awaiting resolution. Some believe that chairman Edward S. Lampert could get his way and buy the company out of bankruptcy through his hedge fund ESL Investments, similar to how he bailed out Kmart Corp. in 2003. ESL affiliate Transform Holdco LLC on Friday submitted a $4.4 billion bid. The offer is awaiting “qualified” bid status in order to move to the next stage, which is the Jan. 14 court-approved auction, where it is expected to meet with competition from liquidators.

One company on the radar for a possible bankruptcy filing is children’s wear chain Gymboree Group Inc. The retailer said on Dec. 5 it was conducting a “comprehensive review of strategic operations” that could include the sale of the firm. The company also said it was closing its Crazy 8 stores and would “significantly” reduce the number of Gymboree stores this year. Gymboree operates 900 stores. The retailer over the last few weeks is said to be considering a bankruptcy filing, which would translate into a second tour of bankruptcy duty. Gymboree filed a Chapter 11 petition in June 2017, and exited bankruptcy proceedings a few months later in October.

Other names that have been bandied about for the past year or so as stressed companies include 99 Cents Only, Stein Mart, Stage Stores, Shopko and J. Crew Group Inc. How bad it will get will depend on results from this past holiday season.

Also on the watch list is J.C. Penney Co. Inc., which has about $4 billion in debt. There’s no immediate concern, but the retailer is one that factors and other financiers say they are keeping tabs on because of uncertainty over whether new chief executive officer Jill Soltau will have the time she needs to affect meaningful change to turn the business around. She joined the company on Oct. 15.

One investor said much of the buying was in place for the first quarter, as well as holiday, meaning that the earliest Soltau will have any impact in terms of inventory and other strategic changes could be late in the second quarter. If holiday was bad, you’ll begin to see pressure building for the first and even second quarters, this person said. He also said Penney’s needs to make a hefty investment in digital and its e-commerce site, which it might not be able to do as quickly as needed because of its debt load.

And in early December, Debtwire had a report that Payless ShoeSource Inc., which exited bankruptcy proceedings in August 2017, could be on the fringe again as earnings have fallen short of forecasts. The report noted that first-lien lenders could be in the early stages of organizing due to fears over the balance sheet.

Martin R. Wade 3rd joined the value-priced footwear retailer as ceo when the company came out of bankruptcy. He’s been leading the charge to drum up attention to Payless’ “We’re back” marketing campaign, which has included the opening of a fake luxury store called Palessi in Santa Monica and the introduction of new categories and brands, including Martha Stewart Everyday.

There is one concern for some financiers regarding 2019 raised by ratings agency Moody’s Investors Service over a year ago. The matter is connected to stressed retailers that placed assets into subsidiaries and how that could put their secured lenders at risk of a possible impaired recovery should the retailer file for bankruptcy. For many retailers, their most valuable asset is their intellectual property. Transferring the IP asset to a bankruptcy-remote entity allows them to then borrow against the relocated asset. The newly issued secured debt typically has a superior claim to the transferred assets, leaving existing lenders further down on the food chain even though the transferred assets had been relied on as collateral for the original loans.

Neiman Marcus was one stressed retailer that did such a transfer with its Mytheresa asset, along with three stores. The move is now the subject of legal claims and counterclaims between Neiman’s and investor Marble Ridge Capital. Another retailer often mentioned on the stressed retailer list is J. Crew, which transferred 72 percent of its U.S. trademarks, valued at $250 million, into a new subsidiary out of the reach of lenders.