Fitch Ratings: Nearly half of all retail bankruptcies end in liquidation

Filing for bankruptcy protection is more likely to end in liquidation for a retailer than it is for other types of companies.

Nearly half of retail and supermarket bankruptcy case studies over the past 15 years ended in liquidations compared with 13% for cross-sector U.S. corporate studies, according to a report by Fitch Ratings. Excluding supermarkets, 50% of retail cases were resolved via liquidation.

"Filers were challenged by weak operating trends, an inability to fund necessary operational investments and competition from discount retailers and e-commerce," said Sharon Bonelli, senior director, Fitch Ratings. "Unsustainable leverage resulting from under-performing acquisitions and lackluster cash. flow also led to defaults."

Highly leveraged capital structures and loss of market share to stronger competitors and declining store traffic ranked among the key default drivers of retail companies, according to Fitch Ratings. Other key drivers included:

• Societal trends;
• Insufficient operational investments due to limited credit access and liquidity;
• Reduced trade credit terms; and
• Poorly integrated acquisitions.

The vast majority of retail sector bankruptcies had outstanding recoveries for first-lien claimholders, many of the capital structures included asset-backed loans that were often repaid shortly after the. filing date via a roll up into a debtor-in-possession facility or with inventory sales proceeds. 

For the retailers that survived the bankruptcy process as going concerns, their 5.4x median enterprise value/EBITDA multiple was modestly below the 6.2x cross-sector U.S. corporate case study median reorganization multiple. 

As to what retail companies are giving Fitch cause for concern going forward, the following retailers are on Fitch’s  “Top Loans of Concern and/or Top Bonds of Concern” list  (as of Jan. 15, 2020): J.C. Penney, Fresh Market, J. Crew Group,  Pier 1 Imports, Iconix Brand Group, Ascena Retail Group, NYDJ Apparel and Serta Simmons Bedding.  

Fairway Market had been on the list, but was removed since it filed for bankruptcy protection on Jan. 23.