The gulf between market share gainers and donors is widening, as weaker retailers lack the means to improve positioning, often leading to bankruptcy, according to a new Fitch Ratings report.
"Filers were challenged by weak operating trends, an inability to fund necessary operational investments and competition from discount retailers and e-commerce," said Sharon Bonelli, Senior Director. "Unsustainable leverage resulting from under-performing acquisitions and lackluster cash flow also led to defaults."
Key retail default drivers in 2019 include:
- Highly leveraged capital structures;
- Loss of market share to stronger competitors;
- Declining store traffic;
- Societal trends;
- Insufficient operational investments due to limited credit access and liquidity;
- Reduced trade credit terms;
- Poorly integrated acquisitions.
Nearly half of retail and supermarket bankruptcy case studies were resolved as liquidations, compared with 13 percent for cross-sector U.S. corporate studies. Excluding supermarkets, 50 percent of retail cases were resolved via liquidation.
For the retailers that survived the bankruptcy process as going concerns, their 5.4x median enterprise value/EBITDA multiple was modestly below the 6.2x cross-sector U.S. corporate case study median reorganization multiple.
The vast majority of sector bankruptcies had outstanding recoveries for first-lien claimholders, many of the capital structures included asset-backed loans that were often repaid shortly after the filing date via a roll up into a debtor-in-possession facility or with inventory sales proceeds.
Fitch's Retail institutional term loan default rate for the TTM Dec. 31, 2019 was seven percent compared with 4.7 percent for 2018. The 2020 rate is forecasted to climb to eight percent.
The retail high-yield bond default rate dropped to 3.9 percent for the TTM ended Dec. 31, 2019, compared with 10.2 percent for 2018. The 2020 high-yield default rate is forecasted at three percent.
There were nine companies from the retail and supermarket sectors on Fitch's Top Loans of Concern and/or Top Bonds of Concern lists as of Jan. 15, 2020.