Bankruptcies Sprout On Both Sides Of The Pond

The dreaded “B” word has been circulating with more weight and frequency, as the week opens with nonessential retailers reckoning with life during the contagion. Over the weekend, the U.K. retail scene was stunned when Debenhams – a 242-year-old High Street brand – filed for the continent’s version of bankruptcy.

Said the company: “This move will protect Debenhams from the threat of legal action that could have the effect of pushing the business into liquidation, while its 142 U.K. stores remain closed in line with the government’s current advice regarding the COVID-19 pandemic.”

The U.K. economy has cratered for all but essential goods and services. According to the Independent, construction has slumped to levels not seen since the financial crisis, new car registrations have dropped by more than 40 percent and consumer confidence is approaching wartime levels. Sean Moran, partner at the law firm Shakespeare Martineau, warned that other well-known U.K. names are also in trouble.

“The government has stated its intention to facilitate cash injections and other financial assistance to businesses, recognizing the imminent threat of insolvencies in many sectors,” said Moran. “These measures include the temporary business rates relief set out in the budget, which will benefit many smaller retailers in the short term. It remains to be seen how quickly the processes for accessing other funds and the payment mechanisms promised will actually materialize. Cash remains king at present, and those businesses without cash or access to credit lines will have massive problems.”

On this side of the pond, the long-term outlook is just as concerning. On Friday, Fitch Ratings downgraded 11 retailers, a list that includes Macy’s, Nordstrom and Kohl’s. Neiman Marcus announced last week that it is pursuing bankruptcy as well. But even bankruptcy protection may not be enough to keep some retailers afloat when the crisis passes.

“Credit ratings agencies use a complex calculation that includes not just sales trends, but also when debt is coming due,” said BDO’s David Berliner, as reported by Forbes. “A lot of lenders may not want to force liquidation, so they will give loan extensions and kick the problem down the road because they can’t handle that many distressed companies at once. Just like hospitals, lenders will want to flatten the curve to not be overwhelmed and only deal with the ones where there is nothing that’s going to help them.”

Tanger Outlets is among the companies that has been mentioned when the topic turns to financial difficulty. Last week, it announced moves to increase liquidity, saying it has drawn down substantially all of its capacity under its $600 million unsecured lines of credit. The company has also taken steps to reduce spending.

According to CNBC, retailers filing for bankruptcy face a unique challenge in that they have no idea when stores may reopen.

“Filing for bankruptcy doesn’t create a sudden cure for the virus, it doesn’t create a cure to open stores – so why incur the expenses of Chapter 11 when you’re not going be able to do anything while business is closed?” asked Michael Sirota, co-chair of the bankruptcy and corporate restructuring department at Cole Schotz.

“Many stores may never reopen,” noted Barron’s Retail Analyst Jack Hough. “In a cover story last summer, when stores were closing at an elevated pace, even though consumer spending looked strong, I explained that the shift to online shopping was only part of it. America has by far the most square feet of store space per person in the world – four times as much as the United Kingdom at the end of 2018, and 10 times as much as Germany. Even before the virus, we were headed for another decade of widespread closures. Now, that reckoning will happen faster.”