This time Fitch was right. One month ago the rating agency listed 8 retail names that were most likely to file for bankruptcy next, just over a month later 1 out of the 8 was down, when teen clothing retailer Rue21 filed a prepackaged bankruptcy on Monday night in Pennsylvania bankruptcy court.
In its bankruptcy petition, the company which retained Kirkland & Ellis as legal advisor, Rothschild as financial advisor, and Berkeley Research as its restructuring advisor, listed both assets and liabilities in the range of $1 to $10 billion.
The restructuring process, during which the company will operate as normal, will lead to company's "transformation into a more focused and highly performing retailer" the company announced in a press release, and added that as part of its restructuring process, it had "entered into a Restructuring Support Agreement (RSA) with certain of its stakeholders that confirms the support of the Debtors' key constituents for the Debtors' restructuring process and contemplates, among other things, an emergence from chapter 11 proceedings in the fall of 2017 with a significantly deleveraged balance sheet. In particular, lenders holding 96.8% of the Company's secured term loan, bondholders representing 60.2% of the Company's issued and outstanding unsecured notes, and the Company's majority shareholder each executed the Restructuring Support Agreement."
The Company has also reached agreements, subject to the approval of the Court, to obtain up to $125 million in ABL debtor-in-possession financing from its existing ABL lenders and up to $50 million in new money term loan debtor-in-possession financing from a subset of its existing term loan lenders. This financing is intended to provide the Company with the liquidity necessary to support its ongoing business operations during the financial restructuring process
Melanie Cox, Chief Executive Officer of rue21, said "These actions are being undertaken with the goal of strengthening the Company's balance sheet, achieving a more efficient cost structure, and concentrating resources on a tighter retail footprint in order to pave the best path forward for rue21. Even in a challenging environment, we are fortunate that rue21 has highly relevant brands, an enthusiastic and loyal customer base, and hundreds of highly performing stores. The agreement with our lenders represents their confidence in rue21's future success even at a time of significant retail industry change. Looking ahead, I am confident that the outcome of this process will be a stronger and more sustainable rue21 for our customers, vendors and business partners."
The company also noted that last month it began the process of closing approximately 400 underperforming stores in its 1,179 store fleet in order to streamline operations, however it warned that it "may evaluate additional store closings as it continues to manage its real estate lease portfolio."
Rue21’s bankruptcy filing lifts Fitch’s U.S. retail trailing 12-month institutional leveraged loan default rate to 1.7% from 0.9%. An impending bankruptcy from Gymboree would further lift the retail TTM to 2.7%, Fitch said. The rating agency expects a flood of future defaults, and forecasts the retail loan default rate at 9% on roughly $6 billion of defaults, though it concedes that "the fate of Sears Holdings and the resolution of J. Crew Group’s bond exchange could materially alter the projection."
It also noted that the high yield retail default rate is also expected to finish 2017 at 9%, with more than $4 billion of likely defaults
Additional Fitch revised its retail concern list, which now lists eleven retailers on Fitch’s loans and/or bonds of concern lists, which compile issuers with a significant risk of default within the next 12 months, including:
- Sears Holdings
- Nine West Holdings
- 99 Cents Only Stores
- True Religion Apparel
- Charlotte Russe
- Charming Charlie
- NYDJ Apparel
- Claire’s Stores
- Chinos Intermediate Holdings (J Crew Group)
Finally putting the 2017 announced store closings in context, here is a chart we showed one month ago. We expect many more names will soon be added to this running total.