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Fitch: Liquidations Common, High First Lien Recoveries in U.S. Retail Bankruptcies
December 1, 2017 / 2:10 PM / 14 days ago

Fitch: Liquidations Common, High First Lien Recoveries in U.S. Retail Bankruptcies

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Retail Bankruptcy Enterprise Values and Creditor Recoveries (Fitch Case Studies — 18th Edition) here NEW YORK, December 01 (Fitch) U.S. retail bankruptcy cases more frequently end up in liquidation than other sectors, and tend to have outstanding first-lien recoveries--themes that remained consistent over the past year despite a growing number of new retail filings, according to the latest addition to Fitch Ratings' case study series, Retail Bankruptcy Enterprise Values and Creditor Recoveries. Fitch examined 39 U.S. retail cases filed since 2005, including nine new cases resolved since the September 2016 retail sector bankruptcy study. The new cases were Gymboree, Payless, rue21, True Religion Apparel, Aeropostale, BCBG Max Azria Global Holdings, Golfsmith International, Hancock Fabrics, and Pacific Sunwear. "Bankrupt retailers often find themselves without a reason to exist from a consumers' standpoint or a financial lifeline to help them rebuild, making liquidation a relatively common solution," says Sharon Bonelli, Senior Director, Leveraged Finance. "Sometimes the operating challenges that cause a retailer to spiral into distress in the first place follow them into the bankruptcy process, creating obstacles to turning around a fallen brand." More than half of the 33 general retail cases studied since 2005 ended in liquidation. A number of recent retailer bankruptcies were resolved as going-concerns, albeit often with a smaller store footprint. Recent examples include Aeropostale, Gymboree, Pacific Sun, Payless, rue21, and True Religion. Gymboree raised new capital from its prepetition term loan holders to help fund the reorganization as a going concern. Earlier cases including Quiksilver and American Apparel were also able to source new-money investment while in Chapter 11. In certain going concern cases including Aeropostale, Pacific Sunwear and Wet Seal, the company's assets were sold to a new operator, allowing them to continue business as a slimmed down chain under new ownership. Debt issue recovery rates in retail bankruptcies continue to be split, with most first-lien claim holders receiving outstanding recoveries and more junior creditors not faring as well. Many of the first lien facilities were ABLs that were repaid shortly after filing via DIP roll-ups. Unsecured claims had below-average recovery rates. Constrained exit multiples, high secured leverage relative to company value, and large lease rejection and trade vendor claims that ranked equally to unsecured debt contributed to a below-average unsecured recovery rate of 24% and a median of 8%. Fitch believes the retail sector will remain under pressure over the next year. We have 17 retailers on our Primary Bonds and Loans of Concern lists, which indicate a material likelihood of default. At end-November 2017, the U.S. retail term loan default rate stood at 8%--much higher than the 0.4% recorded at end-2016. Fitch forecasts the retail sector default rates could rise to 7% for bonds and 10% for institutional term loans by end-2018. The full report, "Retail Bankruptcy Enterprise Values and Creditor Recoveries: Fitch Case Studies--18th edition," is available at www.fitchratings.com. Contact: Leveraged Finance: Sharon Bonelli Senior Director +1-212-908-0581 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Retail: David Silverman Senior Director +1-212-908-0840 Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: alyssa.castelli@fitchratings.com; Benjamin Rippey, New York, Tel: +1 646 582 4588, Email: benjamin.rippey@fitchratings.com. Additional information is available on www.fitchratings.com ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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