According to a Fitch Ratings study of retail bankruptcies, several high-profile chains are running a reasonable risk of default within the next year, including Sears, Claire’s, rue21, True Religion and Nine West.
Apart from grim prognostications about the fates of particular retailers, the 100+ page report also noted such cheerless statistics as retailers that go into bankruptcy are almost three times more likely to be liquidated than firms in other verticals because customer defections are making turnarounds harder to execute. The credit rating agency based its report on a study of 30 recent retail bankruptcies that involved $10.5 billion of debt.
Of the cohort observed, half didn’t survive the process, as opposed to 17 percent across all other industries. The unique exception there, according to Fitch, is grocery, where five of six firms emerged from bankruptcy operational. The report also indicated that average cases took 11 months to settle, based on the time from petition date to plan confirmation. There are exceptions, Fitch noted, that drag on for years.
As for who gets paid back when things go bad? Senior debt does OK, but after that, things get ugly. First-lien lenders generally are repaid in full with cash after retailers file for bankruptcy protection thanks to over-collateralized asset-backed loans. Unsecured lenders do far worse and recover about 25 percent.
“More value was destroyed the longer these companies remained in bankruptcy,” noted Bennett Goodman, cofounder of Blackstone Group LP’s credit arm, GSO Capital Partners. “It’s especially true if we’re talking about the second-lien or unsecured market, where recoveries are going to be a lot lower than the historical past. And that’s primarily because there’s just more senior debt ahead of them.”
