Nine West Holdings's Friday bankruptcy propelled the trailing 12-month (TTM) institutional loan retail default rate to 8.6% compared to the overall rate of 2.7%, says Fitch Ratings. The filing lifted the TTM total retail term loan volume to $5.9 billion.
Our retail sector institutional term loan default rate forecast is 10%, equating to $7 billion of volume, which would surpass the 8.2% rate the sector set in 2017. Fitch anticipates more large retail chains to file bankruptcy this year. Ten percent of the retailers in Fitch's market index are listed on Fitch's Top Loans of Concern list, indicating a material default risk. These retail chains include: Neiman Marcus Group, Sears Holdings, FULLBEAUTY Brands, David's Bridal, TOMS Shoes, Indra Holdings, Everest Holdings, Things Remembered, NYDJ Apparel and Vince.
Nine West has total debt of nearly $1.6 billion at the time of filing. Debt consisted of $108 million drawn under a $250-million asset-backed revolver (ABL), $22.1 million first-in-last-out ABL loan, a $427 million first lien term loan due October 2019, a $300 million guaranteed unsecured term loan due January 2020 and three non-guaranteed unsecured note issues: $427 million of 8.25% notes due March 2019, $28.5 million of 6.875% notes due March 2019 and $250 million of 6.125% notes due November 2034.
The filing resulted from a lack of credit market access needed to refinance the 8.25% unsecured notes before the April 2019 maturity date, high leverage and weak operating performance. The company's department store customers faced declining mall traffic and online competition, which, in turn, pressured Nine West's revenues and cash flow. Adverse trends in the company's own footwear and handbag business, including quality issues and a lack of fashion-forward products, compounded these challenges. Nine West missed a scheduled interest payment on its 8.25% notes on March 15. The company has carried high debt balances since private equity sponsor Sycamore Partners acquired the Jones Group in late 2013 and split it into separate companies including Nine West Holdings in 2014.
Nine West reached a restructuring support agreement with holders of more than 78% of secured term debt and 89% of its unsecured term debt that lays out the terms of the proposed plan of reorganization. The proposed reorganization incorporates a partial sale of assets, a debt to equity conversion for unsecured term loan holders and emergence as a slimmed down entity. A stalking horse asset purchase agreement to sell the intellectual property associated with the Nine West and Bandolino brands and certain working capital assets to Authentic Brands Group LLC for $200 million was signed on April 5, 2018.
Under the proposed plan, first lien term loan lenders are to be paid in full in cash, while holders of the unsecured term loan facility would receive new second lien debt and 100% of the equity of the reorganized company. Noteholder recoveries would consist of the value of unencumbered property of Nine West Holdings in new equity or cash and are expected to be weak.
The 8.25% notes were bid at $0.1025 as of Friday, evidencing their weak recovery prospects.
Nine West's term loan was held by 22 Fitch-rated CLOs as of April 1, 2018, with an average and peak portfolio concentration of 0.57% and 1.44%%, respectively.