Were all of the past year’s bankruptcy cases the direct result of pandemic pressure? New analysis says probably not.
While the majority of 2020’s blockbuster bankruptcies can trace their origins to cash-flow crunches resulting from temporary store closures and other coronavirus disruptions, Fitch Ratings says a fair number filed as a clear-eyed strategy.
Those strategies, according to the credit ratings agency’s analysis of 11 bankruptcies last year, took different forms. Though some went the bankruptcy route to allow lenders to equitize debt claims, others did so to wiggle out of expensive leases and effectively lighten their financial load.
“In these cases, capital structures were untenable and a default may have occurred over the medium term,” said Judah Gross, a director in Fitch’s leverage finance group, pointing to Men’s Wearhouse owner Tailored Brands and Ascena Retail Group as examples of this trend.
Neither Tailored nor Ascena were facing the prospect of having to pay off any significant debt in the near term, and Fitch’s analysis indicates they both could have come out on the other side of the pandemic. However, both firms had unsustainable capital structures.
Tailored saw its debt rocket past $2 billion after it purchased Jos. A. Bank for $1.8 billion seven years ago. But male professionals have recently been trading suits and ties for less formal workplace attire even before the pandemic tanked demand for office-ready fare, further intensifying the pressure on the men’s wear company, which concluded its bankruptcy case in December after filing in August. Earlier this month, it secured $75 million in new funding.
Ascena, on the other hand, had nearly $1.3 billion in debt that was set to mature in 2022. While the pandemic ratcheted up liquidity pressures, it was already on shaky ground in 2019, and had attempted to restructure by selling a 50.4 percent stake in Maurices and winding down Dressbarn. After filing a Chapter 11 petition in July, it sold off Catherines and Justice, and then offloaded Ann Taylor, Ann Taylor Loft and Lou & Grey to private equity firm Sycamore Partners for $540 million.
While changes in consumer spending and apparel brand life cycles left their mark on many fashion retailers, the lack of operational investments coupled with discounters and digital competitors gaining share didn’t help many a company’s ailing fortunes. And when times get tough, access to trade and lender credit tends to slow to a trickle when vendors demand cash on delivery or in advance. Some might hold out for a letter of credit to ensure payment for goods ordered. With costs piling up, putting together a bankruptcy case was one way for retailers to get rid of costly stores and trim their fixed costs or restructure debt to emerge with lower interest payments.
Retailers often react to a downturn by slashing brick-and-mortar expenses for labor, maintenance and marketing, which only exacerbates the malaise in the store experience and hands market share over to better-equipped rivals, according to Fitch’s leveraged finance group, citing Sears as a prime example. And as the situation deteriorates, retailers might not be able to invest in omnichannel, putting them even farther behind competitors that have sufficient free cash flow to build digital experiences and bolster supply-chain infrastructure. This leads to a downward spiral of operations and financial results.
Fitch found that a significant number of retail and supermarket bankruptcies, or 28 of 66 cases, were resolved as liquidations. Excluding supermarkets, 45 percent were resolved through a liquidation. The ratings firm also concluded that debtors filing for strategic reasons may have limited the frequency of liquidations in 2020.