Retailer woes to get worse
Bankruptcies burgeon
The spate of retail bankruptcies are just the beginning of the pain for bondholders in those troubled stocks.
The default filing of teen retailer Rue21 last week has boosted the US retail loan default rate to 1.7 percent from 0.9 percent, and the current struggles of another teen retailer may push it to 2.7 percent in the near term, Fitch Ratings said.
A pending bankruptcy by Gymboree would propel the trailing 12month institutional leveraged loan default rate to that level, said Fitch, which is expecting the rate to spike to 9 percent on about $6 billion of defaults this year.
That forecast could change depending on what happens to troubled department store chain Sears and the bond exchange currently being attempted by J.Crew, said the rating agency. Fitch is also expecting the high-yield re- tail default rate to finish 2017 at 9 percent on more than $4 billion of additional defaults.
Fitch has 11 names on its list of loans and bonds of concern, which pulls together those issuers with a significant risk of defaulting on their borrowings within the next 12 months.
The loans list covers $5.6 billion in debt and is led by Sears with about $2.5 billion of at-risk debt, along with Gymboree, Nine West, 99 Cents Only Stores, True Religion Apparel, Charlotte Russe, Charming Charlie, NYDJ Apparel and Vince.
The list of bonds of concern includes Claire’s Stores, Sears Holdings, Chinos Intermediate Holdings (J.Crew Group), 99 Cents Only Stores and Gymboree for $4.6 billion of bond debt.
The rating agency cited a nowfamiliar list of factors hurting the sector, from increased discounting in the face of competition from juggernaut Amazon to weak traffic trends to changes in consumer behavior and pressure on discretionary spending.
“These factors have created a highly competitive retail environment and accelerated the downtrend in mall-based shopping,” said Sharon Bonelli, senior director of leveraged finance. “Retailers have also suffered from the ebb and flow of brand popularity. Negative comparable-store sales and fixed-cost deleveraging have led to free cash-flow deficits, tight liquidity and unsustainable capital structures for some leveraged issuers.”
As a teen retailer, Rue21 was also hit by changing spending habits as teenagers spend less on fast fashion and more on their phones or what are described by analysts as “experiences” instead of “stuff.” A growing number of leveraged clothing retailers in the teen space have gone bankrupt in the past few years, including The Wet Seal, Aéropostale, Quiksilver, Pacific Sunwear and American Apparel.
Rue21 was saddled with more than $900 million of debt after a leveraged buyout by private equity firm Apax Partners in 2013.
The debt is composed of a $538.5 million secured term loan that matures in 2020, $250 million of 9 percent senior notes that mature in 2021 and a $150 million asset-based loan (ABL) facility.
The 9 percent notes were last quoted at just 10 cents on the dollar, according to MarketAxess. The term loan is bid at 11.625, according to Fitch, “indicating poor recovery prospects” from both.
Rue21 has an agreement to obtain up to $125 million in assetbased loan debtor-in-possession (DIP) financing, a special loan used for companies in distress, from existing ABL lenders, and another up to $50 million in new money term loan DIP financing from some of its term loan lenders.
“A restructuring support agreement reached with 96.8 percent of Rue21’s term loan lenders and 60.2 percent of noteholders includes an expected fall 2017 emergence as a smaller, less-leveraged going concern,” said Fitch.