While business disruptions and liquidity pressures arising from the coronavirus pandemic were a material driver behind many of the 2020 retail bankruptcies, some were partially strategic, allowing issuers to equitize debt claims and rationalize real estate portfolios through lease rejection, according to a new Fitch Rating report.
“In these cases, capital structures were untenable and a default may have occurred over the medium term,” said Judah Gross, Director. “Examples of this trend include Tailored Brands and Ascena.”
Shifts in consumer spending to services and experiences, apparel brand life cycles, insufficient operational investments and increased penetration by discounter and online competitors drove reduced access to trade and lender credit. High fixed costs, including lease and interest payments, pressured cash flows and liquidity.
Nearly half of retail and supermarket bankruptcies were resolved as liquidations, compared with 11% for cross-sector corporates. The 5.5x median enterprise value/EBITDA multiple is modestly below the 6.1x cross-sector U.S. corporate median reorganization multiple.
The vast majority of retail bankruptcies had outstanding recoveries for first-lien ABL claimholders.
There were 10 companies on Fitch’s Top Loans of Concern as of March 10, 2021, the most of any sector. The retail trailing 12-month institutional term loan default rate stands at a record 21% following Belk’s default. Fitch forecasts the rate to end the year lower at 15%.