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Fitch: Sears Could File for Bankruptcy by 2018

As the retail industry waits for Sears Holdings to finally stick a fork in its operations, one major credit-rating firm has named it a “high risk” for bankruptcy.

Fitch Ratings released its latest retail bankruptcies study last week, a 114-page report that named Sears, Nine West and True Religion Apparel among seven chains most at risk of filing for Chapter 11 in the next year to 24 months, Bloomberg said.

Other at-risk chain stores named in the report include Claire’s, Rue21, 99 Cents Only and Nebraska Book Co.

According to Fitch, these seven retailers have struggled to survive amid the rise of online shopping and discount retailers combined with falling mall traffic and consumer spending shifts. Added to this, falling comparable sales and fixed cost deleveraging have resulted in negative cash flow and unsustainable capital structures.

Sears Holdings, for instance, recently borrowed $300 million from chief executive Eddie Lampert’s hedge fund, after the company reported yet another quarterly loss. Moody’s Investors Service estimates Sears’ negative operating cash flow to be roughly $1.5 billion this year.

“Brand degradation and competitive pressures to either price or experience can be real threats to the survival of struggling retailers,” Sharon Bonelli, senior director of leveraged finance at Fitch, said in a statement. “As a result, many retailers move into the bankruptcy process without a real reason to exist and ultimately end up in liquidation more often than bankrupt companies in other sectors.”

Following a study of 30 retail bankruptcies involving $10.5 billion of debt, Fitch concluded that half of all Chapter 11 cases in the retail sector ended in liquidation, compared with just 17 percent across other industries. The report also found that it took 11 months to settle a case, on average, though it took 26 months for department store chain Gottschalks to do so, before ceasing operations in 2009.

In addition, Fitch discovered that first-lien lenders, the highest priority debt, recovered at least one bank loan or secured bond issue in most cases, but unsecured debtors rarely (less than 25 percent) recovered their claims.