Anticipating the Next Wave Of Retail Bankruptcies

·3 min read

After the rush of bankruptcy filings last summer in the earlier phase of the ongoing COVID-19 pandemic, retail watchers had feared another wave in 2021.

But a combination of factors has led to an extended lull in restructurings, as lenders nonetheless remain wary of signs of trouble. A recent report by S&P Global Market Intelligence cited “Government stimulus, low interest rates and flexible lenders” as some of the reasons for the relatively stagnant pace of filings — about 155 companies have filed for bankruptcy in 2021, compared to 180 in the same period last year, according to an S&P Global Market Intelligence report in late April.

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Just about a dozen of those have involved U.S. retail bankruptcies since the start of the year to mid-April, according to data from S&P Global Market Intelligence. But if companies hit trouble accessing financing to pay vendors or to keep their operations on pace, it could set off a cascade effect, experts said.

“Borrowers are currently able to get access to financing to extend the runway, but if there’s a climb in rates, or otherwise tightening on the ready access to capital, then you’re going to see a relatively significant spike in defaults,” said Justin Bernbrock, partner in Sheppard Mullin LLP’s finance and bankruptcy practice group.

“I think, particularly as it relates to the retail industry, there’s now also a fair amount of pent-up consumer demand,” he added. “I think that to some extent, there’s going to be almost a bridge period, where some retailers are going to be propped up by this outpouring of consumer desire to go to a store and try on a pair of jeans.”

Lenders are also continuing to monitor covenants to ensure that the businesses are complying with their terms, bankruptcy watchers said. Lines of credit, for instance, are gauged based on accounts receivable, which if they decline, can jeopardize the line of credit and affect a company’s ability to borrow.

“As that line of credit availability decreases, your ability to use that line of credit to pay for supplies, etc. will also be an issue,” said Nanette Heide, a partner in Duane Morris LLP’s corporate practice group.

Ongoing stimulus funding through landmark measures including the $1.9 trillion American Rescue Plan, which also boosted the Paycheck Protection Program meant to provide forgivable loans to companies, have helped keep some retailers afloat.

In addition, tweaks to aspects of the bankruptcy code, made in part through COVID-19 stimulus measures, have helped smaller retailers by making the process more accessible and affordable for companies with lower amounts of debt, and making the Chapter 11 process a relatively painless vehicle for recovery. Furla USA, for instance, had used the fairly new subchapter 5 provision of the bankruptcy code to execute a relatively quick restructuring within three months.

“When that faucet is turned off, you’ll see more significant impact on businesses that were relying on that money, that aren’t recovering as quickly as they would like to,” said Heide, referring to life for companies after stimulus funds dry up.

“If they’re brick-and-mortar, and they haven’t transitioned to more of an online presence to give them additional sales, especially if they’re in large locations, like a mall or something like that, because we’re still experiencing the pandemic, people are reticent to go out into a large crowd atmosphere,” Heide said.

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